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Gold and Silver Ripping in the Face of Higher Yields, Stronger Dollar

The Daniela Cambone Show Apr 19, 2024

In discussing the price of gold, Peter Boockvar, Chief Investment Officer at Bleakley Advisory Group, predicts, “I think $5,000 is becoming more realistic, and on a parabolic mania overshoot $10,000.” In an interview with Daniela Cambone, Boockvar explores factors driving the rally in precious metals, suggesting that the renewed interest in them “is payback of lack of investment with supply-demand balance happening now in commodities.” He further examines the intricate connections between the Japanese yen, the surge in oil prices, and 10-year treasuries. As the yen weakens, they sell U.S. treasuries to finance oil imports, leading to a tight coordination between the Japanese yen, oil prices, and U.S. treasuries.

CHAPTERS:

00:00 Gold/silver
5:02 Retail investors interested in gold in North America
7:20 Commodity investment vs tech investment
10:12 Gold price
13:26 Silver
15:43 10-year yield and US dollar
20:06 Powell’s rate policy for the world
22:18 Mixed global economy growth
23:41 Concluding words

TRANSCRIPT FROM VIDEO:

Gold/Silver

00:00
Of course, there’s worries about U.S. debts and deficits getting out of control. Those debts and deficits only get worse every single day. Why not own some gold? People are afraid of gold at these levels, thinking it’s too high. Do I want to own this many treasuries? And are there other places where I can store my reserves? And gold is a store of value for that money. We have this mixed bag of global growth right now. That was…

00:27
The biggest bubble in the history of all bubbles. We’re now seeing the unwind of that. This year, next year, there are gonna be a lot of presentable investment situations that those that have.

00:45
This is Daniela Cambone and welcome back to the Daniela Cambone show here on ITM trading today We are talking about gold yields the dollar and what the incredible moves are telling us joining us now is Peter Boockvar He is the chief investment officer for Bleakly Financial Group He’s also the other editor of The Boock Report, play on his name there. I love it. You do fantastic work Also over at CNBC, Peter always good to see you. Welcome back

01:13
Great to see you as well, my friend. Thank you for having me back on. Yes. Yeah, I know offline I was saying sorry for your islanders, but hey, better times ahead. Yes, hopefully. Next year. Better times ahead, like gold, Peter. I mean, we’ve been covering gold for so long. You’ve gotta be smiling here a little bit. You’ve been bullish the metal and silver for a very long time. Let’s start with that and what you think lies ahead.

01:41
I think the two of us have redefined the word patience being a bull on gold and silver. I also have twin toddlers. So yes, patience. Oh yeah, that is a big time virtue for you as well. What I think is the interesting setup for gold was the amazing performance that we saw in the face of the most aggressive monetary tightening in 40 years in response to.

02:11
highest rate of inflation in 40 years. Now on one hand you can say well if inflation’s if gold’s this great inflation hedge well yeah that’s why it should have traded well which is in part true but if the major headwinds historically for gold has been high real rates and a strong currency particularly the dollar then gold should not trade so well and it did and I think a big game-changing event was the

02:39
decision by the EU, mostly the EU, to freeze half of Russia’s central bank reserve after they invaded Ukraine. So if you’re in China and you own more than a trillion dollars at the time of US treasuries and you see just by government fiat what was done, you’re saying, oh shit, do I want to own this many treasuries and are there other places where I can store my reserves?

03:09
the decision that was triggered in China, it was in Saudi Arabia. It’s anywhere that deals with a lot of dollars that is parked in the U.S., whether that’s at a bank or that’s within U.S. treasuries. So that’s when we saw a real acceleration of central bank buying. Then you also throw in that the petrodollar is not as petrodollar as it once was.

03:39
maybe petro dollar slash gold in a way, because we’ve seen of course that countries are transacting more in their own currencies and less with the dollar. And as we know, after the early 70s, any transaction that took place in oil, particularly with anybody wanting to do with the Saudis, had to do it in dollars, and that is no longer the case.

04:07
So there’s extra money that gets produced in that, that doesn’t have to be parked in dollars, and gold is a store of value for that money. And we’ve seen that big time over the last couple of years. And then all of a sudden, gold just needed a little tailwind, and that was possibly the end of the Fed rate increases, even though we’ll wait to see when they cut. But we’re also seeing, while maybe the Fed doesn’t cut, the ECB is ready to cut.

04:38
Swiss national bank already cut, Bank of Canada is looking to cut. So we’ve seen peak short-term rates and I emphasize short-term rates because there’s still a lot of risk that we see higher long-term rates. And one last thing, and I’ll throw it back to you, is of course there’s worries about US debts and deficits getting out of control and why not own some gold? Yeah, yeah, yeah. And all very good points. Before we move away from gold, I just wanna dig a little deeper here.

Retail investors interested in gold in North America

05:07
because you bring up a good point. Obviously the central bank buying, driving gold prices and China, you know, buying gold at record amounts here, Peter, but what I find interesting is that at a retail investor level, the appetite for gold definitely present in Asia. But when you speak to bullion dealers here in North America, it’s not quite there yet. People…

05:35
are afraid of gold at these levels thinking it’s too high to get in here. Do you find it interesting that the retail investor in North America at least has not shown up? Yeah, I think the 5%-5.5% fed bonds rate is a main reason why not only have they lessened their demand for physical, an actual coin or bar form, but we’ve also seen that within all the ETFs.

06:05
where there’s just been a constant drawdown in ETF holdings of gold since early 2022 when the Fed started aggressively raising interest rates. I think the average person doesn’t necessarily make also the distinction between nominal rates and real rates and also understanding that gold can still trade well even though it doesn’t pay you a yield. And that the performance of gold without paying you that yield

06:33
I think really says a lot about the demand. Unfortunately for retail, you look at Costco that’s since September of last year selling gold bar, in a way that introduced the average person who wasn’t necessarily thinking about owning physical gold. They were more focused on buying paper towels and tissues and a lot of boxes of cereal and ketchup when they went to Costco.

07:03
that wow, hey, I guess a gold bar is real and I can actually see it and actually feel it and actually can take it home with me, other than, you know, as opposed to other things that people only see on their computer. Yeah, really good point. That definitely was a game changer. But I also like another point you bring up about gold. You say, money wasn’t invested in commodity production.

Commodity investment vs tech investment

07:31
It went into tech, you know, for the over the past decade. This is payback of lack of investment with supply demand and balance is happening now in commodities. I mean, you look back just to even 2021 when money was falling from the sky and all you need was a PowerPoint presentation and a pulse. And if you said something sexy in tech, you were going to get an investment.

07:58
If you came with a PowerPoint presentation on this new gold mine in early 2021, people were going to laugh at you. And even well before that, you talk about going back to when gold peaked out in 2011 and then really sold off in 2013. All the investor focus, all the investment dollars didn’t go into the mining business. And also that was around the time in 2014 when oil sold off hard.

08:28
and investors started to say, hey, we’re not just going to invest in companies that are just drilling for drilling sake. We want cash flow. We want discipline and so on. A huge amount of investment dollars went elsewhere and we know where they went. We saw where it went, but it didn’t go into the mining business. So we’ve had years of, and then you throw in ESG, and then you throw in every politician that beats you up for being an executive at a mining business.

08:55
putting aside that you desperately need your product, particularly the same politicians that are trying to create this new energy world while they need you even more. So now it’s sort of payback, it’s catch up time where we need the investment dollars, but it’s very difficult not only to put that to work in a friendly jurisdiction, but the timeline of developing a project has just gotten so long.

09:24
that it dissuades a lot of people from even wanting to do that. And they say, do I really want to go through all these headaches of going down the road of developing a mine and dealing with the jurisdiction, uncertain about what, and especially if it’s an foreign one outside of the US, Canada, Australia, for example, of what is the tax rate change going to be? I mean, just look at the experience in Panama with First Quantum and what they went through and literally just looting mine, having it confiscated.

09:53
Now maybe it works out, maybe there’s some reversal that policy, but, uh, you got to have, you know, a set of guts. If, if you want to develop a mind right now that you may not see the fruits of for 10 to 15 years. All right. Exactly. And that just plays into the bullish case for gold, right? Peter, because if there’s obviously less exploration, less juniors, well, we’re finding less gold. Right.

Gold price

10:21
Now we can be sure just by we know how cycles work when gold is above 3000, 4000, whatever, investment money is going to come in, no doubt, and it’s going to help to finance those higher cost projects. But even then, it’s still going to take a long time to bring the needed supply on that would quell prices at some point.

10:43
Well, let me ask you this before we talk silver. If I had to ask you to fill in the blind, you wouldn’t be surprised if gold were to hit. What’s that number for you? Well, I think five is becoming more realistic. And on a parabolic mania overshoot, 10.

11:06
I don’t know if I’m still going to be wrong, man. I don’t even know if I can stomach being long past five, but it can go to 10. Yeah. You know, when I started covering gold, I remember Rob McEwen of McEwen mining coming out, you know, talking $5,000 gold one day. And everyone was just like, thought that number was absolutely absurd. And you know, yet here we are today.

11:33
And the other point I want to bring up, Peter, is, well, it’s interesting that, you know, gold’s, you know, compared to Bitcoin all the time. And we have crazy valuations when it comes to Bitcoin. You know, so why can’t there be those targets for gold? Well, I got that same, I had that same conversation with him probably more than 10 years ago. And his simple math was, well,

12:01
The 1970 bull market in gold was up more than 20 times, 35 even though 35 at the time was sort of artificially set, gold still went from 35 to 850. If gold bottom at 250 in 1999-2000, well a 20X move similar to the 70s gets you to 5000. So he’s right. And you could also argue that

12:27
The fundamental backdrop today for gold is even more intriguing than it was then. Then it was okay, we had a classic inflation scare. We had the suppression of gold since the 1930s and it sort of busted out to the upside. Now we’ve had this world of zero and negative interest rates, massive central bank balance

12:57
and real destruction of purchasing power since the early 70s that just continued on even with Paul Volcker and the deceleration that we saw in inflation in the 80s and 90s. So there’s a pretty compelling fundamental basis for gold that just sort of needed this push, this catalyst to break out of itself and I think we might have reached that.

Silver

13:27
Talk to me about silver because I know you really, really, really like silver, more than gold here. So on a leverage basis, yes. Silver, silver is outside of natural gas. There aren’t too many more volatile commodities than the two of them. And when it goes, it goes. And when it’s dead meat, it’s dead meat. And we know silver has just been in a trading range for, for, for a decade plus, but silver is just so unique. And it’s so unique because

13:57
It wears so many different hats, plays so many different roles. It plays a role if you’re building at a solar farm where you need, the producer of those panels needs silver. It plays a role in building an iPhone and other electronic products. It plays a role in an EV battery. It plays a role if you sit down to eat dinner and you happen to have silver tableware. It plays a role if you’re interested in jewelry and it plays a role.

14:26
as a monetary metal similar to gold. So that’s why I believe it’s so unique and it is so badly lagged, this rise in gold, and it’s badly lagged a lot of other industrial metals as well, particularly copper. And I see a lot of upside here. I mean, silver is almost 50% below, just looking at the front month Futura 28. It reached 50-ish both in 1980 and 2011.

14:56
And here you have gold well above those previous peaks and silver that is still substantially below. And I know sometimes silver one day trades like an industrial metal similar to copper, another day it’ll trade like a monetary metal similar to gold. But I think it’s one of the cheap assets out there. And one of the sort of basic amateurish way of valuing silver is just the silver or gold ratio even though it’s just a back of the envelope more than anything else. But…

15:26
you do the average of 60 times going back the past 50 years and you get a silver price well into the 30. So it’s pretty intriguing to me as well as gold. Peter, I’m curious to get your thoughts on treasury yields jumping just this week as investors reacted to a hotter than expected retail sales report and rising geopolitical tensions. And we have the dollar ripping.

10-year yield and US dollar

15:54
hitting its highest level against the Japanese yen since 1990. Talk to me about the incredible moves we’re seeing in 10-year yields and the dollar. What do we need to know about it? Well, stretching back when you look at the first spurt to that 5% level in the 10-year, it really started around July 27th, 28th when the Bank of Japan decided

16:22
I’m going to tie this to the end and JGB is also. When the Bank of Japan decided to again widen yield curve control from 50 basis points to 100 and JGB yields rose and to me that was the trigger for the 10-year yield to go from about 380-ish up to five. And then after it got to five, the BOJ actually backed off from getting out of negative interest rate policy. The Fed started talking about possibly cutting interest rates.

16:52
in 2024. And then we’ve we started to price in as many as six rate cuts into the Fed Fund’s futures market. And that’s why you saw the back down in the 10-year yield back to around 4 again. But now we’re right back up again, because maybe the Fed’s not going to be cutting at all this year with sticky inflation that is very is complicating their plan. Plus you have the C or B index

17:21
at the highest level since August 2022 that further complicates what the Fed wants to do. And also the conversation that was alive and well in the fall of last year about rising debts and deficits that sort of went away when yields fell. Well, those debts and deficits only get worse every single day. And for the first time in our lifetimes, I do believe they matter. And you know, getting back to the Japanese.

17:50
and sorry to sound hyperbolic here, but when we had $18 trillion of negative yielding bonds around the world, that was the biggest bubble in the history of all bubbles in terms of dollars. And we’re now seeing the unwind of that. And the higher rates that we’ve seen in Japan, where the 40-year JGB yield, and the reason why I bring up the 40-year is because it’s furthest out from…

18:19
BOJ manipulation and basically zero short-term interest rates. So it’s the most market-driven area of that yield curve. That yields the highest level since 2011. And where JGB yields go helps to determine where German Bund yields go, helps to determine where US Treasury yields go, and we’re all in this together. And with respect to the yen, Japan is the largest foreign holder of US Treasuries.

18:48
They own less than they did at the peak, but they’re still the largest holder. So where the yen goes directly influences their appetite for US treasuries. Japan imports about 95% of their energy needs. Maybe it’s a little less if based on the last data because they’re beginning to turn on nuclear plants, but they basically import a majority. And when the yen gets weaker.

19:17
that gets more expensive for them. Well, what helps to finance those energy needs is they sell US treasuries and they bring that money back. So I think that that interrelationship between the rise in oil prices, the weakness in the yen, the rise in long-term interest rates are very intertwined. It’s not the only reason why we’re seeing these moves because we also have interest rate differentials between the yen and the dollar card.

19:47
course, and the oil prices are still moving with geopolitical reasons. And so, but it is a factor that flows through. So when people wonder like who cares about the yen? Well, you should care very much about the yen because it flows into US markets, US interest rates very directly. Exactly. And you know, along the same thought pattern here, Bloomberg had a good article

Powell’s rate policy for the world

20:16
basically, you know, the headline Powell’s US rates warning means headaches for the rest of the world. Federal Research Chair Jerome Powell is making life tougher. The article says for his peers around the world, does the prospect of higher for longer US interest rates reduces room for easier policy elsewhere? So that’s actually an interesting question, is whether call it the ECB

20:45
the BOE and some others, are they going to sort of wait for the Fed to lead them in terms of direct rates or will they go their own way? Because interestingly, no, Powell spoke this week and purposely said hire for longer, we’re not looking at cut rates anytime soon. The same day that Christine Lagarde was interviewed on CNBC saying, you know, we’re going to go our own way.

21:13
and we’re going to be cutting rates in June. She basically told you that and other colleagues of hers have told us that too. So now whether that’s the right thing to do and whether that works out for her remains to be seen because the commodity price inflation we’re seeing in the US, she’s seeing it there. So it’s not like she’s seeing that much different of an inflationary dynamic, but what she’s dealing with is no growth in the Eurozone. So she’s in a more difficult.

21:42
stagflationary position than Jay Powell has here. Jay Powell at least has some growth that’s going along with the inflation, which gives him more flexibility to stay tight. Lagarde is really being pulled in a few different directions of the real slow growth European economies that want her to cut, like Italy, and at the same time having to acknowledge, well, their mandate is solely inflation, not growth. Yeah.

22:10
It will be very interesting to see how this will play out and how these chess pieces moves and will wrap. I guess, you know offline we were talking with your bigger concern here of how, you know, looking at the environment, global environment, how, you know, we have some places growing drastically like India and others slowing down like China. Like I guess to your point, we have this mixed bag of global growth right now.

Mixed global economy growth

22:38
And even just within the US, you have the high-income consumer that’s traveling, going out for dinner, going to concerts, sporting events, living life, and then the lower-income consumer that can only afford what they need. There’s no excess money for what they want. And we’ve heard that time and again from a lot of different retailers. You have the housing market where the pace of existing home sales is near 30-year lows, but home builds are doing better because…

23:07
we need more supply. You have manufacturing that’s in a recession, but service society economy that’s doing better. You have government spending that’s goosing one part of the economy, but causing inflation and hurting other parts of the economy. So people can’t talk in homogeneous terms like, oh, the economy is strong or it’s not. There are a lot of moving parts here. It’s a very, very much a mixed bag as you stated, as is the global economy as well.

23:39
I think that’s really, really well said. Peter, I guess just final thoughts for the folks at home. I always like to empower people and give them some tools to walk away with. I mean, like you said, it’s a mixed bag, even just here in the US alone. What should one be doing here? So I know it’s a loaded question. No, well, we started out talking about our patients. You having the extra patients because we can’t have our kids.

Concluding words

24:08
But I think that can apply to investors generally, that the risk-free starting rate is 5%. That gives you a lot of optionality in terms of being patient, where for the first time in more than 15 years, you get actually paid generously to be patient, and that be price sensitive. Don’t just chase the market because it’s going up, thinking you’re missing something, because I think…

24:38
this year, next year, there are gonna be a lot of presentable investment situations that those that have cash will be able to take advantage of, whether it’s in public securities and stocks and bonds, or it’s in commercial real estate because somebody’s distressed because their 3% loan is repricing at eight and they need some equity, there are gonna be a lot of interesting situations here for those that are patient.

25:07
So be liquid, be nimble. Yes, that’s not to say don’t invest. We’re very bullish on commodity stocks, as we talked about in a variety of different commodities areas, and their pockets of cheap stuff out there. So there’s always something to buy, but don’t be afraid to have a little bit of extra cash. Don’t feel like it’s burning a hole in your pocket.

25:30
Well said. Peter, I always love getting your thoughts. The folks could get more of you from your book report. I love the name. Play on words on your last name. They can check me out on Substack. And if they’re interested in wealth management services, they can check out our website and reach out. There you go. Peter, thank you so much. We will see you soon. It’s great to see you. Absolutely.

25:59
And thank you all for watching. We’ll have more great content coming your way. So be sure to keep watching the Daniela Cambone Show here on ITM Trading.

SOURCES:

https://x.com/pboockvar

https://boockreport.com/
https://finance.yahoo.com/news/us-global-investors-says-costco-183744015.html?guccounter=1

https://www.google.com/finance/quote/GCW00:COMEX?hl=en&window=YTD

https://www.reuters.com/markets/commodities/future-first-quantum-mine-is-people-panama-decide-us-official-says-2024-03-05/

https://www.cnbc.com/2024/04/15/us-treasury-yields-as-investors-consider-economic-outlook.html

https://www.bloomberg.com/news/articles/2024-04-17/powell-s-us-rates-warning-means-headaches-for-rest-of-the-world?embedded-checkout=true

https://www.youtube.com/watch?v=LhNOfOibHyU

Sources & References In This Article

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