In the latest Goldnomics latest podcast, we consider whether the gold price will reach $10,000 per ounce in the coming years and what factors will drive prices.
Watch on YouTube or read the quotations and transcript below.
Dave: Hello and welcome to the Goldnomics podcast where we look at global markets through the lens of precious metals. And you can keep your eye out for new episodes on iTunes, on SoundCloud and also on YouTube and you can like us on Facebook and follow us on Twitter.
And wso far in this series of podcasts we’ve looked at 2018, and what developments we can expect in the global financial markets for 2018. And then in our last episode we asked the question:“Is this the greatest stock market bubble in history?”
This month we are asking the question: “Is the gold price gonna hit $10,000?”
And as usual I’m joined by Stephen Flood, CEO of GoldCore and Director of Research and well-known precious metals commentator Mark O’Byrne. Gentlemen, welcome once again.
Mark: Hi everybody.
Stephen: It’s great to be here.
Dave: Now is the gold price going to $10,000? – $10,000 Mark really?
Mark: Yeah, who knows, I don’t know, you don’t know, Steve doesn’t know, nobody knows and nobody can predict the future and that’s always the first point that we always make.
We can’t predict the future we cannot predict the future price of any asset. But generally over time assets tend to appreciate, not because they are appreciating per se but because fiat currencies are losing value over time.
So, I mean that’s the first core point that has to be made but I suppose when forced to make calls on these markets which sometimes we are – we take part in the Bloomberg gold survey and we take part in the Reuters precious metals poll and we’re polled about the outlook for these prices – we have a fairly good track record in this regard over the years.
So, when we look at it, I mean, you have to be bullish it in the world we live in today. In terms of we looked in the previous podcasts at the “The Everything Bubble” and the stock markets and their overvaluation. We see both stock markets and bond markets as overvalued and I think in that context and a lot of other factors particularly geo-political factors I think the outlook for gold is as bullish as it has been a long time.
Possibly as bullish as it was in the early 2000s. So, yeah, I think we’re both of the view that is going higher and the question is how high and over what time frame really?
Dave: Right, so what time what time frame are we looking at here do you reckon?
Stephen: Next hour or so, who knows!
Mark: It depends what Trump tweets!
Dave: Steve, I’ll drag you in on this here. So, do you see it going to $10,000 an ounce?
Stephen: Oh yeah, no doubt. And the time frame it obviously is very difficult to pin down. Short term you’ve got the futures markets playing a huge role setting the gold price. The paper gold, market chasing the physical gold market. It’s like the tail wagging the dog. So, short term I don’t know where it’s going to be but I do think the long-term fundamentals are very supportive of higher gold prices, i.e. lower currency values. We’re in a world where currencies are competitively being devalued, they’re being printed. Politicians and central banks are paying the bills of today with the money of tomorrow and they’re their impoverishing savers and pensioners in in the process. So, you know everything that’s physical, everything is tangible and gold is one of those, is going, its monetary price is going to rise with that backdrop.
Dave: Right. Okay, and I suppose to give a bit of a framework on this, we probably have to look at it through a number of different angles. I mean geopolitics is probably one of the key drivers for this is. Would you agree on that?
Mark: Yeah, that would be one of them. I think that the monetary aspects would be bigger and monetary policy and the scale of quantitative easing we’ve seen, just the destruction of the central bank balance sheets, you know that’s probably a bigger factor.
We tend to look at it through the lens of four key factors. One is the monetary side of things, the other one is geopolitics and then the systemic side of things – MSGM – and then there’s the macro.
So, the macro is the wider economy and we’re gonna have a recession, or depressions, or booms or busts and do we have inflation or deflation – the wider macroeconomic backdrop. So, they’re like the four fundamentals that you need to evaluate the market. And I think if you look at those four fundamentals….. And the final thing and then is actual supply and demand in the gold market and all those factors that drive the supply and demand in the global gold market.
Dave: So, let’s take that one then from the top. So, we’re looking at monetary policy primarily as your key driver, do you think?
Mark: Well I think so, yeah. And oftentimes that reacts to these other factors but I think it’s the prime driver over the medium and long term.
Dave: A monetary policy and quantitative easing is something that we’ve mentioned in the last two podcasts. But just in case our listeners haven’t listened to either those podcasts, and I would recommend you going back and find them and have a listen they’ve very good content in both of those, give me give me a 30 second explanation just of the quantitative easing and the monetary policy impacts on the gold price and we can expand on that from there?
Mark: Thirty Seconds? That’s ambitious! I mean yeah, basically the central banks have printed a huge amount of money and increased the debt load.
The debt is in effect being transferred from the private sector to the public sector and yet the debt has just gone pretty much parabolic. I mean when you look at the charts it’s incredible. And we covered the debt to GDP ratio in the US in the recent podcast.
In most Western economies and indeed at a global level now that global debt to GDP ratios or over 300%. So, debt is going up very sharply and it’s nearly a straight line up at this stage, whereas GDP seems to be evening out.
We’re not getting…. Before when you increase debt you’d get a leverage return on the increase in debt whereas now you’re not getting that return and so, it just makes the economy very vulnerable.
And Jim Rickards puts it well. He talks about 1998, when Wall Street bailed out the hedge funds LTCM, the biggest hedge fund in the world. And then in 2008 Wall Street got bailed out by the central banks. Now the central bank’s balance sheets are massively impaired and they’re potentially in big difficulty if you get another crisis which seems to be a question of when rather than if.
So, the question then is: Who’s going to bail out the central banks? Who’s going to bail out the system the next time?
Stephen: The IMF!
Mark: Yeah the hope is that it will be the IMF but I’m not so sure how that’s gonna work out.
Stephen: Or in other words you and me, the little people, where we are the lender of last resort in this entire construct.
Dave: What form does that take? How do you and I become the lender of last resort?
Stephen: Well we’re gonna pay more in taxes. We’re gonna have to work harder for less and our savings and our pensions are going to be levied and bail-ins as well.
Dave: You mean bail-ins now as opposed to bail-outs. So, just explain the difference now on for our listeners.
Mark: Exactly well, with the so-called “bailouts”, the taxpayers….. the government went and took money from the taxpayers in the form of higher taxes and pension levies to bailout the banks. And now the narrative has changed whereby they are not going to take money off the taxpayers they’re going to take money off the depositors. And as the so-called creditors who have been protected over here-to-fore you know and the narrative is “Oh we’re so, good now. We’re looking after the taxpayers, we’re just going to hit the creditors. You know they’re going to have a haircut rather than the taxpayer”. But the biggest taxpayers in society are SMEs and business people and the people who create wealth and create jobs in our economies. And if you go and take their capital away in the form of taking there deposit it’s going to have a hugely deflationary impact. So, it’s a really big issue that we cover quite frequently because….. even just this week in the market update because, if you look at the Italian banks, you look at the various European economies and the level of debt…. Many European economies including here in Ireland, and there are real risks in that regard.
Stephen: If I come in there you know if corporates will be hit, they’re the ones who are very unprepared in this eventuality. So, if there is a bail-in of your high street bank, it’ll be sold to the people on masse saying; “Hey listen, only those people over a hundred thousand are going to be tapped to pay this bill. But those people who include entities which are corporates and those corporates will be tapped as well and that’s…..
Dave: What’s the knock-on effect of that? People listening are going to are say oh that’s okay as long as it’s corporates and it’s not me.
Stephen: Yeah, so who do the little guys work for? They’re the SMEs, they’re the people who actually you know, keep the lights on and keep money moving around the economy and keep people in jobs and pay mortgages through their employees. So, they’re gonna be hit up. They’re gonna have a massive haircut and I don’t know even how…. if this has been planned out. How they’re going to manage it all. So, this is this is going to affect every single family in all of those major states that have had you know, totally unsustainable debts. And it’s coming, and I can absolutely say that it’s going to happen at some point. You’re going to see it. I don’t know which economy first it could be somewhere like Italy it could be France, it can be Spain, Portugal, even Ireland. All of these economics are creaking under the burden of debt. And much of that debt has been hidden off balance sheet by the central banks. And it’s going to come back onto the market at some point. We’re gonna see higher interest rates and when that happens then that debt becomes very much unsustainable even at the rates that use…. You know the some of the ratios you see on banks they say; ”Hey you know, we are safe, we have passed a stress test, we can manage in a difficult time”, but I don’t buy it. I think a lot of this debt is still there and I think it’s unmanageable.
Dave: So, as good as money in the bank is no longer a good thing?
Mark: Not exactly. What’s the expression; “As safe as houses”! And that’s the expression in Ireland regarding our property market that it’s “as safe as houses”, and we know what happened there.
Stephen: I was talking to a chap who works at a major bank in Europe, I’m going to say. And they were talking about their credit risk. And they said; “Listen the bank it’s completely fine you know we’re safe as houses”. And then they all have a big laugh about it because they know damn well what would happen to the house prices if interest rates go up.
Mark: Yeah and that narrative: “Cash is king”, can become “Cash is trash”, very quickly if inflation, ticks up and just some recent data in the US and UK and particularly the US and UK where the inflation pressures are building in quite a big way. And it looks quite a stagflation area which is the condition of the 1970s, 1980s where we saw gold prices go up twenty four times. So, but just one last point that, cash is king, and we can move to cash is trash and on the bail-ins thing as well, people think that they have that the government guarantee in each country, which is €100k now, £100k now. It used to be £250k in the UK. And very quietly and surreptitiously that was reduced to 100k pounds there about a year…
Stephen: It’s 75 now, in keeping with the Euro.
Mark: So, yeah well, I’m surprised. I must check that. It was very quietly done and the thing about that is that people think:“Oh well I’m fine you know up to a hundred thousand”. And what they do is to put….. If they’ve more than that they put it into two or three different banks. Yeah, but what would happen in that scenario, the government’s will need to get a certain amount of money to bail-out the banks. And therefore, the guarantee could be reduced overnight with the stroke of a pen. So, the hundred thousand guarantee or seventy five thousand euro guarantee or whatever it is could go back to fifty thousand.
Dave: It’s just a figure of revenue that has to be raised?
Dave: And tell us how does this then…… this going to drive the gold priced because effectively people will be taking the cash out of the bank and putting an in to gold.
Mark: It will be one of the factors that would drive it yes.
Dave: And is this widely-held or is there a wide understanding of this bail-ins issue at this moment in time or do you think that there’s still a lot of education to be done around this?
Mark: The people have no clue. You know the majority do not have any understanding whatsoever. It’s rarely covered in the media. So, people are not aware about this huge…. just a lack of information in effect you know. I think people in our circles in the precious metals industry, tend to focus on these risks and sometimes we’re accused of exaggerating them. But they’re very real risk. We’ve done very in-depth research on this. And the research cannot be argue with. The facts are all there. It’s all laid out if you choose to look into the legislation.
Stephen: In Ireland that the “Bail-in Tool”, as the regulators called it, was brought in about two years ago. It was signed into law by the Minister for finance at the time. And I was like this is such a landmark piece of legislation. If it came in through Europe through a regulation the bank resolution directive. And I did a search in our Parliament, where our elected representatives, discussed the matters of the day. And I couldn’t find one single reference to bail-ins as being a point of discussion at all in the record. It just came in, it was signed into law as a statutory instrument, no discussion in any local political level. And yet it has a massive impact on every man, woman and a child in this country.
Mark: Yeah interesting we got an email from his clients this week. He’s talking about, I think a similar thing happen Australia just in the last week or two weeks, that it was passed in Australian Parliament. And again, there was very little debate and I want to look into it a little bit more in depth and I think it’s something that we might cover in the market update in the next week or two weeks.
Stephen: I would say though when… we don’t want to labour the bail-in point but if you manage the treasury policy of a company I think it’s absolutely your duty to look into the risk that you have across institutions. Like banks do this themselves. They look at the amount of money they have at risk across institutions they have certain levels. I think now even SMEs need to do that with their reserves. They need to have that money…. even it might be more difficult to manage. They need to have that money spread across as many banks as possible, banks that are safe, and they need to look at the balance sheets of those banks. And lending practice they need to look at where those backs are located.
Mark: The safest jurisdictions.
Stephen: The safest jurisdictions. And they and they need to do this today. There’s no time to waste. We don’t know when it’s going to happen. It could happen in ten years it could happen next year. We don’t know but the fact is the bail-in tools are there, the scene is set for higher interest rates, debt burden is going to become difficult to manage and we think that there’s going to be market events that these Treasury officials are going to have to answer for. And also, for people like “high net worth’s” and people who manage their family’s affairs they also need to be more discerning as to where they bank.
Dave: You raise a point there, the scene is set for higher interest rates. Now, a number of people listening to this they’re gonna think right okay well gold’s yield is zero. Okay interest rates are going higher. Surely that’s gonna be bad for gold?
Mark: Yeah that’s very much the perception out there and that’s the narrative and you see the media saying rising interest rates is bearish for gold. But if you look at the history and look at the data, interest rates rose continuously throughout the 1970s from below at the 10-year US Treasury, 10-year bonds below 5% in 1970, to up above 15% in 79-80 and gold prices went up from $35 to $ 850 in those nine years. So, rising interest rates weren’t a negative for gold whatsoever.
Same thing happened again more recently. Obviously some people might say; “Oh well that’s ancient history and we’re a long way from the 1970s”.
Okay, fair enough well let’s look from 2003 to 2007. I think interest rates went from roughly 3/3½% to 5/5½ %and the gold price went up from $ 400 to $700/800. So, the narrative is incorrect. Rising interest rates are actually bearish as you can imagine for assets that are bought with debt and with leverage. So, property would be particularly vulnerable to rising interest rates absolutely. Even stocks to an extent because a lot of stocks are bought on margin. The wider economy is vulnerable to rising interest rates. Gold is the least vulnerable to rising interest rates. Where gold is vulnerable as there’s always a degree of truth to these narratives… where gold is vulnerable is towards the end of an interest rate tightening cycle when you get a real rate of return. So, if interest rates rise for a long period of time and you get a decent rate of return over the actual inflation rate then gold becomes vulnerable. And that’s when I would be nervous about gold and I would be very strongly telling clients it’s time to reduce allocations to gold. I mean we would always have a view that you should have a bedrock of financial insurance in your portfolio of maybe 5% allocation to physical gold. But in that scenario whereby you are getting you know you have a decent bank and you’re getting a decent yield on your deposits. Now that’s a good time to put some money into the bank and reduce allocations to gold you know.
Stephen: When interest rates are rising, it causes and people to rotate from one investment strategy to another and that creates volatility in the market. And that’s the case for gold. So, a changing interest rate cycle is very bullish for gold whether it would be falling or rising. When interest rates are high and static, everything is steady, the market is doing okay. Interest rates are high we’re getting a decent rate of return on their savings then the argument for other type of investments that don’t pay as high an interest rate decreases. And that’s the same with stocks because you know you have more risk and you have a fairly boring in rate of returns sometimes. If you’ve interest rates up around from you know five six percent and that’s a fair return for the risk you’re taking. So, you buy bonds, you might you might go heavily into bonds and gold doesn’t look attractive. But if interest rates are rising to five percent quickly and then falling from five percent that creates anxiety in the markets that creates a need for risk mitigation and the argument for gold. So, it’s not so, much high interest rates but high steady interest rates. And I don’t think we’re there and we haven’t been there for a while. So, I think that that’s the counter-argument.
Dave: What about the quantitative easing issue?
Stephen: Yeah, obviously you might say the rug is being pulled from under the market because central bankers using their godlike powers are printing money. So, they’re changing the rules of the game to suit their own political purposes. And they say they’re not political but they absolutely are. And they answer to political masters in Europe on a national level. And so, when you print money you’re inflating asset prices, you’re selling that you’re selling a good story.
Dave: Artificially inflating?
Stephen: Yeah but it doesn’t look that way. So, that because it’s happening on a fairly steady basis.
Dave: On one side you’ve got a stock market where it’s very highly publicized that the stock markets are increasing the whole time. But you don’t hear about the increase in the amount of cash that’s being printed and the correlation between the two, the connection between the two.
Mark: Absolutely and it was a real correlation. If you look at the central bank’s balance sheets in the stock market, it’s amazing the correlation there. There was a correlation with gold up until their 2011 you know and that’s one of the theories. There’s a variety of different ways that you can look at the gold price and say right well you know what fair value for gold price is. Let’s look at these different correlations and compared the ratios of different things. And one of those is the increase in central bank’s balance sheets. And it was going like one-for-one throughout the 2000s and then more recently 2011 that’s when the gold price fell very sharply but the central bank balance sheets continued to increase very significantly.
Dave: And why did that relationship decouple. Because obviously we’ve had such printing of money over the last number of years. Why are we not seeing the gold price continued to rise significantly as it did back then?
Mark: Well I mean there’s a number of reasons. One is that it had such a huge increase in the first place. I mean it gone from $ 250 in 200, to $1,900 in in August 2011. So, I mean that’s a big move.
Stephen: That’s 10% a year isn’t it?
Mark: Exactly and it’s about 600 percent total return over those 10,11 years.
Stephen: On a 20 year basis it’s actually beaten most other asset classes which it again they don’t talk about in the media.
Mark: Yeah exactly there was great research from PWC just a week or two weeks ago. And it was publicized by the World Gold Council and it should have gotten picked up more widely. And they basically said, PWC one of the biggest accountancy firms in the world in an advisory piece for sovereign wealth funds, who are some of the wealthiest and the institutions with most amount of money in the world. These sovereign wealth funds have been advised by PWC saying gold has actually outperform stocks and bonds over the long term . So, our argument has always been in our space, gold is a hedge gold is financial insurance, it’s a store of value and it is all those things. But now there is actually research that gold has actually outperformed stocks and bonds over the last… it’s a 10 year and the 20 year timeframe. And then actually over a 40 year time frame, so the lifetime of your average investor. If some prudent young man in this mid 20 start to save for his pension today and there’s probably not too many Millennials doing that, but we’re always advising that you should start saving for your pension early.
People are retiring much later so, it could be 40 years, it could be the lifetime of your investment horizon, your pension horizon. You know so, over 40 years since 1971 gold returned 10.5%per annum. And it’s outperformed stock markets and bond markets. You would think that the actuaries out there and the pension funds and all these people would suddenly gone “Okay!” You know and they’re desperate for return. So, I think they gradually will but the narrative is so, strong against gold that it’s slow to turn, the psychology towards it I think will to turn and I think that that returns argument is quite an important one.
Dave: Yeah so, from a monetary policy point of view there’s been three key areas that you’ve discussed there. There’s the bail-in issue. There is the fact that in an upward interest rate environment gold actually performs well. And then the third thing we’re talking about is the quantitative the easing issue and how that continues to be very bullish for gold? So, on your list of criteria to look at the gold price. Monetary policy was the first one. Your second most important is?
Mark: The macro environments. You know whether it’s inflation, deflation stagflation is probably the next most important one yeah and then and then the geopolitics and then the systemic is very important too, the health of the overall system .
Dave: So, from the macro point of view in an inflation deflation environment we’ve seen very low inflation over the last number of years. Is that set to continue? Are we actually going to start to see more of an inflationary environment? And which is more bullish for gold?
Mark: Yeah, it’s a big question. High inflation and deflation are bullish for gold. Stagflation is bullish for gold, that’s inflation and then low economic growth. Benign inflation or low levels of inflation are bearish and that’s what we’ve seen in recent years. Because your previous question was “why did gold decouple from the central banks balance sheets from 2011.?”
And part of the reason was that it had become overvalued and one of the key things there was in the last few months it went up 20% from $1,300 to $1,900 in the matter of a few short months. And we went on Bloomberg TV and we said this gold is fundamentally overvalued and it could fall sharply, it could fall by 50%. Because it had gotten very overvalued in the short term. But at the same time I think a lot of people were surprised that it has fallen by as much as it did and that it stayed as low as it did for as long as it. Did I think part of the reason is you know…. coming full circle…..inflation has remained relatively benign.
Dave: What’s your view on then on inflation going forward? Are we starting to see inflationary pressures come in?
Mark: Yeah, we are we are, and it certainly looks like we were in the early stages of that. It’s a long time coming though and who’s to say that if you get a massive sell-off in stock markets, we could get a bout of deflation. And then central banks will probably respond to that in their usual manner by printing more money. And the Federal Reserve would likely go back to printing more money and QE would be started again in the US rather than the tapering. So, possibly the inflation may take off the slightly later than we think but it’s very difficult to tell why.
Stephen: I look at it and it’s really, really powerful arguments for inflation and deflation. And you know you go to central banks and they’re like “You know all of our policies they are not creating inflation at the targeted rate of 2%”, was the conversation last year and even in the last two or three years and because they see inflation as being related to growth. And I liken it to an elastic band that’s been stretched. Okay and on one side you have the inflationary pressures building up and pulling the elastic band one way and on the other side you have the deflationary pressures. On the deflation side you have technology feeding in price reductions on an awful lot of services and products around the world. And then on the inflationary side you have money printing. You have employment rates falling, more people in the employment market being paid, and more money moving around. It’s chasing the same kind of products.
And so, these things, these forces are pulling each other. And So, I think the theory goes that once you get to full employment, the employment market then heats up quite quickly as whereas employers start to vie with each other to pay more money to those employees. And then they spend more money and that raises the prices. And so, the US just hit full employment basically at four point one percent. We’ve met in this last month. And the thinking is that that’s going to really transmit in to inflation numbers very quickly that means interest rates are going to go up. Which means it’s the end of cheap money, which means the market, the stock market becomes very anxious about this and that’s one of the reasons it started to sell off was it was based on employment numbers. And we saw that last month and you’re seeing it in markets right across the world. European inflation rates are starting to rise and the UK is far ahead of everyone else, it’s over 3% now and it’s rising much faster than they thought. And so, and you know the stage is set for higher inflation rates, thereby higher interest rates and more risk when it comes to debt burdens in the future. That’s where we are at. That elastic bands and stretch in the in favour of inflation.
Dave: I like that analogy. So, let’s touch then on the geopolitical issue and we’ve seen an awful lot of increase in geopolitical tension particularly over the last 12 months. How is that going to now start factoring into the gold price?
Mark: Well, I think it’s surprising people that it hasn’t factored in as much, but I suppose there’s been a lot of saber-rattling and a lot of threats but thankfully war hasn’t broken out.
Stephen: Well not in the west. But in other parts of the world.
Mark: Well, yeah! I’m talking in terms of the US and North Korea primarily, which has been the biggest geopolitical threat of war. But yet there are proxy war zone and obviously recently we see what’s happening Syria. The Middle East is massively destabilized and has been for a long period of time but it looks more destabilized now than you’ve seen in a long time and it’s getting to the stage now where you can very much see that the parties aligning against each other in terms of a you know in Syria now, and with Turkey they seem to be allying themselves with the Russians and the Chinese in the background, seem to be quietly supporting the Chinese and then Turkey. And then as obviously there’s the Israelis and the Americans. And it’s….. I don’t know I think it’s one the most uncertain…. and I mean my background in his history. When you study history, you know you see these things and I think it’s as uncertain as it’s been for a long a long time and it looks like we’re building up to quite a significant, major, major military confrontation between world powers, particularly Russia. You see the demonization of Russia. And the Russians have done lots of naughty things that they shouldn’t be doing you know, but the dialogue is…. it’s not about dialogue. There’s no one sort of saying that we should sit down and talk to these people that as was seen after the Cold War. You know, we realized it’s not good to demonize nuclear powers and we should all sit down and you know deescalate and decommission arms and you know the whole nuclear arms race, people realize that’s not a good thing. We have a lot of hawks, neoconservatives in the States and the Pentagon is quite hawkish. And they see Russia as an emerging power and they don’t want the Russians emerging as powerful. They are trying to keep them down and then you have Trump come in and he’s…
Stephen: The great an antagonist.
Mark: Yeah, he’s crazy and he’s just he’s a perfect fall guy. And he can be manipulated to do anything and he’s doing all sorts of things that are creating huge instability in the world. And just even the… everything is the military, it’s always an aggressive response. Never sort of stepping back. Even when we were talking briefly before this the tragic school shooting in Florida you know…. And you know and the issues with gun control in the States. And the response from Trump is we need to arm the teachers you know and it’s just it’s just crazy. So, everything like it’s aggressive.
Stephen: At least he didn’t say “we need to arm the students”.
Mark: Because that’s the next step.
Stephen: And if I could come in there and you know I look at the geopolitical backdrop and what I see is a lot of saber-rattling. So, as Mark just said but I do think we have is a generation of leadership who has forgotten what that what the cost of war is and how you have to fight for peace. And you have to always be on guard, you have to maintain diplomacy, you have to have those institutions of diplomacy. And you’re seeing the United Nations being attacked all the time and it’s losing power. Nationalist agendas are becoming back into vogue and I think that’s happening. Again I harp back to the same theme. I think that’s happening because it’s an easy answer. It’s an easy drum to beat nationally to blame a bogeyman for the woes of the people because you’re deflecting from yourself, you’re deflecting from the inherent weaknesses in our systems, which is down to monetary policies and the thieving that’s going on there. And you’re able to point to somebody else you’re saying; “Hey it’s not us, it’s not us that are destroying your livelihoods and giving you no security in your employment.” And you know you haven’t had a pay rise in thirty years is the average of American worker. “It’s the Russians, it’s the it’s the Chinese”
Mark: “It’s the Mexicans, build a wall”.
Stephen: Yeah, it’s Al Quida, it’s the Mexicans. So let’s blame anybody but ourselves. So, it’s not because they don’t feel it’s their fault it’s that they don’t have any responses. They don’t have a planned a strategy to do that, to deal with this. They’re just going to…. you know it’s like Goebbels… like this is just as straight from the book the you know, World War II Goebbels. You blame, you make a bogeyman you blame him, you distract people from it and then you maintain control. Eventually it ends in tears. And it’s going… you know, I don’t know how this is gonna work itself out but you’re seeing it right across the world and right now you have the disintegration of NATO. You have Turkey going off-piste, you know invading countries, taking on military equipment from you know…. not from the NATO countries but from Russia and places like that. And same with Egypt. So, the old alliances are breaking down. This is not necessarily in Russia’s interest so, probably some will argue it is. This is a void of leadership from the US stepping back and the United Nations not able to assert itself. And a generation of people who have forgotten what the cost of war is and how important peace is.
Mark: Yeah, I’d agree in a very large part, absolutely.
And this is a quotation from Hemingway which sort of you know sums it up I and I’ll paraphrase him because I don’t know the exact quotation. But it’s “The first panacea of the mismanaged country is inflation and the second is war and both bring a temporary prosperity, but both bring permanent ruin”. And that’s war it’s massively costly a massively destructive you know, and I mean Trump is just……
Dave: Very pertinent at this time.
Mark: Yeah absolutely because we’ve been talking about inflation. And now we’re talking about the geopolitics and the risks of both terrorism and war. And it’s just very very costly to society and you know the US had trillion dollar deficits for a long number years now. And with Trump, the trillion dollar deficits getting even bigger you know I think the number came out recently at 1.5 trillion they’re projecting now and a large chunk of that is on military budgets, they’re absolutely massive. And it’s hugely destructive to nations and especially in the global economy. Because we’ve made such progress in recent years towards globalization and free trade. And then there’s all these multi-lateral institutions whether it’s the United Nations, the trade agreements we have you know it’s lifted a lot of the world out of poverty. Then there’s huge issues with corporatism as well and inequality but we have made progress. And unfortunately, I think that that progress is at risk.
Stephen: I think that actually one of the major faults lies with the media. They are the protectors of democracy. They’re supposed to hold these people to account, they’re supposed to question. They have become partisan, they have become tribal, they have aligned themselves politically and very outwardly and unapologetically but the cost of that alignment politically is that they get access to information but only the information that’s required to sell the story. They no longer question politicians, no longer question policy and we the people, are left holding this risk. And I think they’ve completely and utterly let us down in that regard.
Dave: So, it’s just bringing let’s just bring back to the topic in hand and the price of gold. How does this specifically drive the gold price higher?
Mark: I suppose it’s a risk trade, it’s risk off, it’s safe, haven demand. You’ve seen it throughout history. There’s James, Steele in HSBC, he’s one of the better gold analysts out there. He did a great piece about war and gold there recently and just how gold goes well during war and has throughout history.
Dave: It is that hedge against uncertainty.
Mark: In the 1970s the gold price went up so significantly and it was partly due to the US which had been massively spending a huge amounts of money during the Cold War and then the Vietnamese war also. President Johnson had the… was it the Great Society or the Big Society? Whatever that program was called which is a big sort of tax and spend sort of a social welfare. And there’s some good stuff there but they were spending a lot of money in terms of the military side as well. It was very costly, and people began to question the value of the dollar. And Charles de Gaulle the French president said you know we’re not trusting it you know, and he put his money where his mouth was and they demanded the return of their gold reserve. They sold the dollar and took back gold in effect. And that’s just a sovereign example of what happened. People became concerned and began to buy gold. So, when you have the US, which is probably the great superpower in the world has ever seen….
And we’re moving to a multipolar world but there are elements in the US upper echelons, shall we say, in the deep state who are desperately trying to hang on to power. You can see it very clearly. 19th century was the British century, 20th century was the American century, the 21st century is going to be a multipolar century, some people say the Chinese century, I’m not so sure, some people say Asian century. I think Asia is going to be very powerful. Just given demographics, the lack of debt and a whole variety of other reasons. But we are moving to a multipolar world and Asia will be very powerful in that. And so, to me that’s the big picture geopolitical thing that’s happening and it means that the dollar as a reserve currency of the world is very vulnerable. If you look at the reserve currencies they tend to have a life span of seventy to eighty years. So, you can see Portugal in the 15th century had it for 78 years then Spain, then Holland, then France, then the UK and more recently the US. And the US has had it since after World War I in effect for pretty much since the1920s. It’s hard to know and exactly pinpoint the exact year that the US took over from sterling, when the dollar took over from sterling as the reserve currency, but you could say it’s roughly sometimes in the 1920s.
Dave: Just so, we try and cover off as many angles here as possible. Let’s just briefly talk about the underlying fundamentals of gold, the supply and demand fundamentals? Particularly let’s start with the supply side. What are the issues there that you see that underpin the gold price heading towards ten thousand dollars?
Mark: Well everyone’s always about the demand side and you know all the focus on the market tends to be on the demand side and it’s hugely important but the supply side is as important. And you know we are at peak gold, the production of gold is peaking increasingly. It’s something we’ve looked at for a long number years, increasing a lot of analysts are accepting that. Even Goldman Sachs have a report talking about peak gold.
So, just for the listener’s peak gold is… We’re not going to run out of gold any time soon. There’s still – not a huge amount of gold in the Earth’s crust but there is gold in the earths crust. Supply is increases roughly at about 1.5% around 2% per annum. But the supply is actually decreasing. We haven’t found any major gold mines for a long period of time.
Dave: And it’s getting increasingly more expensive to extract it? So, all the easy to be found gold has been found. So, it’s the case of going… digging deeper.
Stephen: Going to the moon with Elon Musk!
Mark: Exactly and that’s the narrative of the gold bears. It’s one of the few sort of arguments I see as to the why gold prices won’t go higher. Gold prices are gonna go lower because we’re going find a huge amount of gold on Mars, right??
So, it’s like you know we can’t even get it out of the ground in South Africa. We can’t get out the ground in these nations and we are having to go deeper and deeper and as you said it’s hugely costly to do it. On this planet, in this atmosphere, where we breathe oxygen! Can you imagine the cost of trying to get an ounce of gold off another planet? But I can’t get a man back on the moon how are we going to get men up there mining.
Stephen: Even if you look at mine supply I think I saw it’s 1.6% and then demand has grown by 18 percent since 2001, every single year. I mean like it’s off the charts.
Dave: And where is that increase in demand primarily coming from?
Mark: China, primarily that’s a big factor.
Stephen: China yeah was the story maybe last year before but Germany has become the number one demand market in the world.
Mark: China. The Chinese gold market was liberalized in 2003. So, from 1950 to 2003 Chairman Mao actually banned gold ownership in 1950 and the Chinese people couldn’t actually own gold for more than 50 years you know. So, the per capita consumption of these 1.3 billion people is increasing from near zero base. So, that’s a really long term structural thing that’s happen since 2003 and continues today. You know the German thing is a more recent phenomenon. And I think that’s very interesting because it’s born of the Euro. And the Germans realized that they share a currency with Italians, and Spanish, and Greeks, and Irish and people who are not as prudent as them. And they are very worried about and they’re beginning to diversify in to gold you know. But meanwhile the Spanish and the Irish and the Portuguese aren’t buying gold because they think they have the German money. They have the Euro and are sorted as you know and they don’t realize the risks. It’s a funny, funny dichotomy that’s going on there. You know the Germans realize the risks but we think we have their currency. So, we’re a grand and we don’t need to diversify into gold.
Dave: And that demand. Is that primarily investment demand now?
I mean, gold is heavily used in electronics and also in certain cultures jewelry is very important in gold form, but do you think this this 18% is…..
Mark: It is s very broad based and that’s the thing that’s why gold is so supported… the prices is supported because there’s so, many different drivers of demand. Jewelry is huge, particularly in Asia and obviously in China and India. And people buy gold as a store of value there and in the Middle East. But investment demand, I think is the one that will ultimately drive and that’s what drove it in 2011, ETF demand and coin and bar demand. Suppose that’s where the demand in Germany is coming from but also in Asia the more sophisticated investors in the India and China are moving more to coins and bars.
Dave: And when people hear about the demand for gold for jewelry, particularly in certain Asian cultures, that’s really…. it’s not as an adornment. It’s not as something pretty to wear. It’s culturally that…. the jewelry is not as crafted let’s say but it’s as a store of value. It’s worn or kept as heirlooms or as an investment, as a store of value rather than as a….
Mark: Primarily I mean it is a bit of adornment as well. I’ve been in Mumbai and been around India and I’ve seen the Indian women wear their gold and you know they look amazing and it’s a beautiful thing you know. And there is a little bit of that going on but it’s primarily as a store of value. It’s a savings vehicle and it’s part of the dowries. It’s been there throughout their history and it doesn’t look like it’s changing any time soon.
Stephen: So, yeah, I mean I can speak to the demand that we see on a daily basis and obviously we’re well known for our storage programs and gold. I know that sounds like a shameless plug but you know that’s why come to us. Because we offer segregated allocated gold whereas most people don’t. So, we have clients who are coming to us and… interesting just in the last six months…..
Dave: Just as you talk about the segregated allocated gold, we don’t have time to go into that at the moment but that’s probably definitely something we should cover off in podcast.
Stephen: Yeah, all gold is not equal. It’s how you hold it and most people hold gold in exchange traded funds and we’ll talk about it another time. But they would have some serious structural issues about, them especially when it comes to certain economic scenarios. So, a lot of our clients would come to us because of the segregated allocated nature. So, I have clients who just recently…. two particular clients who are going into retirement and they are moving a significant sum of their cash reserves and some of their hard assets, like in property and putting into gold, physical gold which they just intend to sell off to live for the next ten, twenty, thirty years . And they’re going to sell off a portion every year, raise cash and pay their bills and go through life. They see that as a retirement nest egg. They don’t want to have exposure to the equity markets, bond markets or the banks. They just want their gold literally waiting in a segregated vault in Switzerland.
Mark: They see it as cash.
Stephen: They see it as money and you know what if the price goes down a little bit – it doesn’t really bother them. If it goes up, hey that’s a good day. And they’re just going to be a taking a little bit of money every single month and sell a bit of gold and raise that cash to live off and that’s their future. And we have two very large clients doing that just in the last few weeks. And we’re seeing it as a trend emerging as well.
Dave: Just one the demand side. Talk to me about central bank demand, what are we seeing in central bank demand?
Mark: It’s high but it could go a lot higher given the scale of the foreign exchange reserves that are out there but basically, I think it’s roughly 400 metric tons per year. So, it’s chunky I mean just today big breaking news overnight the Russians bought another eighteen point seven metric tons in January which is 600,000 troy ounces. Which is quite a lot for Russians as Russian tend to buy three hundred thousand, four hundred thousand ounces per month.
Stephen: And it’s more than the Chinese now.
Mark: So, the Russians have now surpassed the Chinese in terms of their gold reserves. I think they’re the sixth largest in the world. The US would be number one.
Stephen: I saw in your piece today, the Turks. Where the Russians brought sixteen tons the Turks have bought two hundred and four tons was it last year or something?
Mark: Yeah in 13 months.
Stephen: That’s incredible.
Mark: Yeah, it’s a lot.
Stephen: That is them disengaging from NATO, looking to protect themselves in a changing world, in a multipolar world that they’re getting ready for a multipolar geopolitical backdrop.
Mark: Absolutely and they’re encouraging their citizens to buy gold as well. A bit like the Chinese have done as well. I think they realize that these geopolitical tensions are soon to erupted. And I think it’s going to lead to currency war scenarios at some stage. This is a symptom of it.
Stephen: If you’re Turkey up until now you would have had your backstop was the hundred pound gorilla the United States. Who will come to your aid via NATO and protect you in all situations. They don’t believe that anymore and now they’re saying you know what, we need to protect ourselves in every way we can.
Mark: This is a long-term structural thing because a lot of these countries have quite low gold reserves vis-a-vis their foreign exchanges. So it’s a very strong trend that’s set to continue and it could actually accelerate. I mean that Russian buying just this month, its increased quite significantly and if tensions decrease as we as we’ve seen recently or sorry increase should I say. Then I think that gold buying will increase and the Chinese have stopped buying US Treasuries as well. The Chinese have stopped reporting their gold buying, and the Chinese can be quiet for a number of months and then they make a big announcement. And they suddenly go from you know a 1,000 metric tons to 2,000 metric tons. And we could see a big leap forward in the Chinese gold reserves as well in the coming weeks and months. So, again it’s another strong fundamental support on the gold market and a factor that should drive gold prices much higher in the coming months and years.
Stephen: It’s funny, at I home I have three young kids and you know you’re always chastising them and giving them advice and what to do and you know telling them to behave themselves. And sometimes they promise everything they say; “yeah absolutely I’m gonna behave dad and I’ll do exactly what you say no problem, I follow the schedule”. And then I turn around and I say; “You know it’s not what you say it’s what you do that counts”. And in in this case you know looking at Turkey, and all these markets around the world it’s not what they say. They’re just saying everything to appease people, well watch what they do. If they’re buying gold they’re doing so, because they have good reason, they want to protect themselves from an uncertain future.
Mark: Yeah absolutely and the US still has over 8,100 metric tons and hasn’t sold one ounce.
Stephen: The Germans brought it back. They brought it back into their own storage. Why would you suddenly take your gold back from, again you’re the hundred pound gorilla the US, because they have issues in terms of trust.
Dave: I have to challenge you here gents because we’ve looked at this from a macro point of view. We’ve looked at it from a geopolitics point of view, from a monetary policy point of view, from a supply and demand point of view. And on every one of those you’re seeing all of these factors as being bullish for the gold price. What’s the banana skin for the gold price? What if we’re sitting here in two years’ time or three years’ time and we’re still looking at gold at the same level? What has to have happened in the world for that to happen?
Mark: Elon Musk mines gold on the moon. I mean I think the biggest risk would be if the banks, central banks and the officialdom realized that this entire….. everything we’ve talked about is completely unsustainable. They realize that their primary solution to this is massive debt forgiveness and debt write-downs and some form of debt jubilee that potentially is a banana skin for the gold price. That to me is the primary one, I mean if peace broke out in the world and suddenly all these competing nations; China, Russian, America decided; “guys this is crazy. We’re gonna potentially annihilate each other here or at least going to badly damage our economies. Why don’t we sit down and work together on a solution? Let’s have a big you hug”. Like when Stalin and Churchill and Roosevelt sat down. So, we need to get these guys into the room and they need to sort these things out but unfortunately that just doesn’t look like it’s going to happen anytime soon you know.
Stephen: I’ve one theory and it’s slightly on the conspiracy side but you know the only reason gold will stay where it is because the price is repressed.
Mark: Oh yeah, slightly. Yeah.
Stephen: They continue to print money to sell the narrative. You have a media that goes along with this and doesn’t question it and keeps people ignorant of the facts. And they sell the gold prices as it rises and they do so, with printed money through their proxy banks and private equity firms. And they keep this narrative going for a long time.
Mark: Yeah I agree with that and that’s the key thing and I meant to get to it earlier on when you asked why the gold price fell as much as it did, given the factors in terms of central bank’s still printing money. I think part of the reason was manipulation and there’s a huge amount evidence that the gold price has been manipulated as all assets are today. That’s what quantitate easing is. They’re printing money to buy bonds, to push up the price of bonds and push down the yields.
Stephen: There was this chap on the TV the other day and he was a big Wall Street head and he turned around on mainstream TV and said: “You know, one-third of all financial assets now are owned by governments”. One third and he kind of just said it like and there was a pause and then the two or three anchors that were there in the room with him interviewing him kind of moved on.
Mark: Like …“Moving swiftly on, nothing to see here!”
Stephen: “Wait stop did you not just notice what he said here?”
Mark: We might flesh that one out yeah. But that is a risk and I think that’s been a risk and recently, and I think ultimately the forces of supply and demand will overcome that manipulation. And I think that was seen from the 2000 to 2011 period. I think ultimately the people who are manipulating the gold price will realize this price is going higher and they’ll have to retreat to higher ground, so to speak.
But to expand on it, sometimes I think, my little conspiracy theory for today is that sometimes I think that a lot of people talk about you know digital gold and crypto-currency and Bitcoin and this is the big threat to gold. And I don’t think it is. I think it’s actually quite complimentary and I think what’s happened in the bitcoin and the crypto currency space is actually highlighting the vulnerability of the fiat currencies and of the banking system and all the rest of the monetary system.
Stephen: The frustration people have with yield.
Mark: Exactly. This will be very good for gold and silver in the medium and long term. But in the short term I think it creates a risk because you know who knows you might get people who would have ordinarily migrated into buying gold or silver buying crypto-currencies instead. So, in the Western markets I think it may and my conspiracy theory is some in ‘officialdom’, they want to push some capital into the crypto-currency market rather than in to the gold and silver market.
Dave: Right. Now Steve as you said not all gold is equal and I think that that actually might be a title for our upcoming podcast. But I think that’s a good place for us to leave it for today. Gents I want to say thank you once again it’s been fantastic and extremely informative.
I hope everybody that’s listening to this podcast has felt the same way. And what we want you to do is to comment and share this podcast with people who are going to be interested in it. Send us comments about what you’d like us to talk about in future podcasts. Remember you can subscribe on iTunes, on YouTube and on SoundCloud and you can actually sign up for our market update at goldcore.com.
Follow us on Facebook, follow us on Twitter but from me Dave Russell, Mark, Stephen thank you all very much.
Mark: Yeah. Thanks guys! And yeah if there’s any questions at all just you know put it in on the YouTube channel as well and we’ll address them in the upcoming podcasts and webinars.
Stephen: Yeah thank you so much for listening in today.
Mark: Thanks guys.
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