Gold Stopped Following The Rules | This Week In Focus

Welcome back. I'm Jeremy Saperin and this is This Week in Focus. Now, this is not a recap. It is the arguments from this week that actually move money and two things nobody covered at all. So we'll start here because it tells you where this market really is. Nobody's arguing about whether the Federal Reserve cuts interest rates this month. The argument is whether it raises them. A hike and a hold have been running dead even, right around 50% each. And as we record this, the CME FedWatch tool has the odds of a cut at this meeting at zero. Not low, zero. Now, with the market pricing more tightening by year end, not less. That is what the market says. Here is a man who spent 15 years inside the room that decides it. Jim Bullard ran the Federal Reserve Bank of St. Louis from 2008 to 2023. I think the committee is split pretty much down the middle, so 10 to 9 or one way or the other. I think a lot of people that are sitting on the fence could be convinced to go either way. And I think the speech today recognized that and stated the case, which is basically the main case that the committee is making as a whole, which is just that the real economy is doing quite well. The inflation has not come down. They may have to do more. All right, 10 to 9. So the market says 50-50. They're describing the same thing from two different rooms. And gold came off its best month since January anyway, up better than 10%. Worth being precise about that. I mean, gold set its record just under $5,600 an ounce at the end of January, and it is still roughly a fifth below it. So last month was the best since the TA, but not a new one. And coming up, why this inflation is the wrong kind for the only tool the central bank has. The silver supply problem that a higher price cannot fix, and the metal you cannot build a tomahawk without, which has no futures market at all. And of course, a former Fed president on why American gold is still valued at $42 an ounce. Now, one note before we start. We recorded this before Friday's employment report, which is a number both of my guests said decides the Fed. Stay with us. All right. And before any of it, one thing changed underneath this market, and most people have not registered it. We'll roll a graphic for you right now. Between March of 2022 and October of 2023, five-year real yields in the United States rose by more than four percentage points. Real yields, meaning what is left after inflation. And on the relationship that had held for two decades, gold should have fallen about 55 percent. It rose seven. Then real yields fell less than a single point over the next two years and gold rallied 110 percent. Now, those figures are from the chief strategist at UBS Investment Bank. So the relationship has not weakened. It went one way. Gold barely reacts now when rates rise. It moves enormously when they fall, which raises the obvious question, if not rates, then what is it pricing? I asked Bullard whether gold ever came up in 15 years of these international meetings. It doesn't come up very much in the U.S., but I do think the activity in the gold market, certainly according to people I've talked to overseas, it is a bigger issue overseas because you could say the foreign central bank might want to hold the gold instead of U.S. Treasuries. There certainly have been banks that have been diversifying away from Treasuries. And so I think there it's more of a factor. And I know markets have been betting one way or another against that in recent times. And, you know, gold still is an indicator of maybe lack of faith in the Fed. So normally you'll get gold running up if that credibility is being eroded. So I think in that sense, there is some signal there and that's certainly something that is on the radar screen. All right. So former Fed president saying two things there. Foreign central banks have been diversifying out of the Treasuries and into gold and gold running up reads as a loss of faith in the Fed. Now, hold on to that, because everything else this week sits on top of it. Phil Striebel runs strategy at Blue Line Futures more than two decades in futures, and he did not did something before the market repriced that is worth understanding, because it is a process rather than a prediction. Well, we've had an incredible run up. We were running into some resistance levels. You look at silver, it got up to like 100 day moving average, couldn't really close over that level. Gold was kind of teetering back and forth around that 200 day moving average. Futures had been pushed up. But, you know, we've got all these different hangovers and these effects that can weigh on things. We haven't had a lot of dialogue out of Warsh, and we know that when he comes out hawkish, he tends to be very aggressive about his stance on it, gives very little context and dialogue. And it just made sense that we were due for some kind of small pullback on here. So we did reduce a lot for clients here and a lot of clients who are waiting on the sidelines. It's a great opportunity with this pullback here, start sticking your toe in the water. But definitely an interesting setup here on the markets and an interesting read from the Fed on how they're going to handle policy going forward. Notice what is not in that answer. No forecast, two prices that had stopped working and a judgment about a man's style. Now, the mechanism, because everything rests on it, gold pays you nothing to hold. So when cash pays you three and a half percent or better, holding metal has a cost, raising rates raises that cost. And that's the whole relationship. It is also the one UBS says has broken. Here's the call on the Fed. We do believe that the Federal Reserve, if they do raise rates, that it will be a policy mistake here, and ultimately it will need to be undone in the near future. So plain version of why interest rates work by killing demand. If prices are rising because people are buying too much, that works. If they are rising because supply got interrupted, it does not. In context for anybody who's been away, I mean, the conflict with Iran is now six months old. American strikes and Iranian retaliation has continued throughout the week. Traffic through the Strait of Hormuz is disrupted and Brent crude has been in the mid 90s. That is the supply side he's talking about. I mean, inflation that we're seeing isn't demand driven. Fifty percent tariffs on Canadian goods, you know, retaliation. You've got crude oil up on Iranian strikes. You got wheat at three year highs on an attack on a Black Sea Russian port. These are supply shocks here that are taxes for the consumer. But rate hikes, they're designed to cripple the demand, but they don't manufacture more oil or wheat or a tariff infrastructure. So you'll get more economic damage if you start to try and raise rates here to fix some of these smaller issues that ultimately end up resolving themselves. All right. And this is the part that matters most to anybody holding metal because it names the environment. What this is really driving is it's creating more of a stagflation environment. You've got rising inflation in certain components and you've got the declining growth. Gold typically back tested does really well in stagflation. It just doesn't do well in deflation. And we don't really see a situation where we're going into something like that. Stagflation is prices rising while the economy slows. It is the one backdrop where a central bank has no good move. And historically, it's been gold's best environment, which is why supply driven inflation is a different trade from demand driven inflation. Two arguments from two different guests arriving in the same place. You know, you look at the twos and tens that spread collapsing. That's the 10 year yield. So it was a steepening yield and now it's flattening down at 39 basis points. Every time the Fed is hiked into a flattening curve, the curve has been right and the Fed has been, you know, too early on raising rates. So ultimately, what would end up happening in that situation is the Fed will ultimately have to cut rates. I think that the labor market in a very soft spot, consumer confidence, very low. What that is, the gap between what the government pays to borrow for two years and what it pays for 10, it narrowed to 39 basis points, a little over a third of one percent. And when that gap closes, the bond market is saying growth is slowing. His point is that the bond market has the better record. The second argument and this one about jobs, the monthly count of American jobs minus farm work is the number both of my guests said settles this. And the Bureau of Labor Statistics published preliminary revisions for the year through March, marking the total down by seventy nine thousand. Private payrolls came down one hundred and seventy eight thousand. Government went up ninety nine thousand. What I think investors miss is Warsh at the Fed is not just worried about inflation. He has a laundry list of things he's got to look at. And I would argue number two on the list is the labor market and the labor market is crap right now in the US. I mean, how do you get excited about job growth like that? So we're going to see another non-farm payrolls read here September 4th, later this week, Jeremy. And I think if we keep seeing these numbers that are less exciting to the US government, I don't think they have the ability to raise rates at the pace that they're talking about. One caution on that, and it came from the man who spent those 15 years inside the room. You look at the rest of the labor market data and there are at least 20 or 30 other indicators of labor market performance and aggregate them into an index like the Kansas City Fed's index. It will tell you that the labor market is basically in equilibrium. It's very close to the net. The unemployment rate is very close to the natural rate of unemployment. So this everything is healthy about the labor market. What has changed is immigration policy is different than it was in the past. And we have to take that into account when we're assessing the labor market. So one monthly number looks weak, 20 or 30. Other measures says the labor market is fine, which means a soft print does not automatically mean something is breaking. Then late this week, Federal Reserve Governor Christopher Waller said he's willing to support holding rates if inflation keeps easing. Hike went from about two and three back to a coin flip. But there's a bigger thing sitting under all of this. And this is where a former Fed president got very direct. I asked him what the long end of the bond market is pricing that the short end is not. Yeah, the long end has to worry about overall fiscal position of the U.S. and the path for that going forward. And the path is to head to, you know, 120 percent of debt held by the public or 150 percent of debt held by the public. And, you know, the market has to price whether they're going to demand a risk premium for that. I think that they are. And they're wondering what the U.S. policy really is here. All right. So a path to 120 or 150 percent of the economy in public debt and a market starting to charge extra for it. I then asked whether protecting the Fed's independence eventually means raising rates, even when that makes the government's own interest bill worse. Oh, yeah, absolutely. Every politician I've ever met thinks, you know, the nominal interest rate, whatever it is on that day, should be lower. Even when we were at zero, we had people lobbying us to move it lower. So I think, you know, from a political perspective, you can't ever be low enough. I think, you know, I'd like that group of people to get better at macroeconomics so that they would not say that all the time. But that's that's what they say. And it's up to the Fed to say that, hey, you know, maybe maybe if we did a little bit more restrictive monetary policy today, then we wouldn't have to do as much later and we'd avoid getting into a crisis later on. And one more on the Treasury's decision to step into the long end of its own bond market. Oh, yeah, I think so. And I appreciated Stan's comments there. I'd align myself with that. I think it's really been very hard to try to intervene in this gigantic global market where you've got a lot of foreign buyers. You can do a little bit, but really those are tactical moves. And the markets are pricing fundamental policy, not the tactics day to day. You can see that you'll see movements day to day and that, you know, you'll see some fluctuation based on the intervention. But I don't think it'll disrupt the long run trend by changing tactics. All right. Which is the whole argument in one line. Tactics move a market for the day. Policy moves it for years. Now, the part nobody outside this market bothers to explain, silver is not a smaller gold. It has supply problem that a higher price just simply will not solve. You look at silver, the structural deficit that can't be fixed quickly at all. It's been running supply deficits for consecutive years and 70% of it comes out as a byproduct from copper, lead and zinc. So it's not like the higher prices, they can automatically bring some to the table. And if you look at all the investment demand and what's going on with these buildouts and everything else, solar and electric vehicles and the grid, really you're seeing that structural demand there. So sit with that. Roughly 70% of the world's silver is not mined for silver. It comes out of the ground as a byproduct, copper, lead, zinc. So when the price of silver triples, the people who could produce more of it are not silver miners, they're copper miners making their decision based on copper. And that is why the deficit runs for years instead of correcting in months. He also flags something in the fund flows. The ETF flows. This is where silver's kind of interesting is because you look at the gold market, the ETF flows have finally turned positive on the year. While silver, it's still down 7%. Last week, they added 3.11 million ounces. So buyers are coming in at that silver market. And that's why I believe that we are going to start moving consistently higher. Those flow figures are as of this tape at the start of the week. And that is the tell. Gold funds flows have turned positive on the year. Silvers are still negative even after the run. And if the deficit is real and the money has not arrived yet, that is the gap he is trading. This one got the least attention of this week, and it may be the most important thing. John Fennec runs Fennec Consulting Group. He's been on three calls this year with people inside the American government about a single metal. This is not just a defense thing. We both know that tungsten is used in tanks, in tomahawk missiles. You can't make these things without tungsten. It's an irreplaceable metal. Tungsten is heavily used in technology. Irreplaceable. And according to the people he has been talking to, also short. I've been talking to this person and her staff. I've talked to four different people now. They all say the same thing, Jeremy. We're a year and a half to two year deficit in tungsten right now. So for all the naysayers that say, John, the price is at $2,800. It was at $920 earlier this year. Yeah, I agree. That's a big move. But you have to understand the dynamics and why the move happened. So from $920 a ton to over $2,800 inside of a year. Now the structural part, and this is why you have probably never traded it. There is no ETF tracker in tungsten. There is no futures market in tungsten. You have to buy tungsten equities like KAZR and WSRIF, right? I mean, that's what you do. And so 17 plus percent of my portfolio right now is in tungsten equities. So understand what that means. No futures market, no fund, no paper. If you want exposure to a metal, the defense industry cannot substitute. There is one way to get in and it's buying the companies. That is very different risk from buying an ounce. And then the contradiction at the heart of it all. Talk about how there's a disconnect in the US, Jeremy, of, hey, we need all this critical minerals, but we don't have any permitting going on. What the heck is going on here? We don't have refineries. I mean, we have some, but it takes a lot of capital to build them and permit them. That's my thinking, Jeremy, and I could be wrong on this, but my thesis is that the US will start building refineries, smelters, things like that over the next couple of years. So it's not one problem. It is two. You cannot get a mine permitted quickly. And even if you could, the West largely cannot process what comes out of it. And here is something that surprises people who own both. Gold can go up and your mining shares can go nowhere. And that is not always the market being irrational. First, the mechanism, and this is the single most useful thing either guests explained this week. Absolutely. It's an important concept for investors to understand. So if you buy gold at 4,000 an ounce and it goes to 4,400, you're going to make 10%. But the miners during that period should go up two or three X to that moving gold. And if they don't, you have to ask why. What's wrong with this stock that I own? Or is that company hedging production if they're a producer? Because if you're hedging production at a certain cost, that could be impacting your upside. So the test is not whether your miner went up, it's whether it went up two to three times as much as the metal did. And if it did not, something specific is wrong. And hedging is one of those usual suspects. Then he named names and he was blunt about it. I think Barrick is actually getting worse. We don't own a position in Barrick. I mean, it is cheap on the longer term chart, no question. But Newmont has been consistently a leader over the years, in my opinion, along with Agnico, AEM. And so we own those two. And they're I think the first and second largest holdings in GDX right now with Barrick being third. And so you want to own the sector, Jeremy, for this very reason. And if you just own Newmont versus Barrick, you're going to have two different experiences. But if you own GDX, you own a number of companies, dozens of them. And you're playing a directional move in gold miners because you believe in the free cash flow generation and you believe in a higher gold price. And so GDX, we call the bottom on it at 70 bucks. We were pretty darn close. And now it's at 97 or 98 as we record this. So you can make money by buying ETFs as core holdings, I think, as an investor and then sprinkling in juniors around that. We call that a hub and spoke structure. OK, hub and spoke fund in the middle. So no single company can ruin you. And the individual names size small around the edge, which brings us to the part of this week, nobody clipped. If you want one segment of this, keep this one. A trader with more than two decades in futures, a fund manager who has been in business for decades, different worlds, different books. Neither one of them was asked about risk. Both raised it anyway. It's all about the position sizing. So whatever you're, you know, a person individual is comfortable with, you know, I don't suggest putting more than like 10 percent of your total net worth in something like silver or things like that because of this volatility that it has. But it's definitely like, you know, it's all about what allows you to sleep at night. Like, what are you comfortable with that you're not going to wake up and your hair is going to be on fire? All right. And then he gave the practical version with numbers. So I think that for people, they really need to determine, OK, what's my core position? So say that's just making up something like 500 ounces. And then what's my tradable position? Well, 200 ounces. And then define your max and your minimum. Say a thousand might be your maximum position out there and your minimum might be the 500 ounces. A core you never touch, a tradable piece around it, a maximum and a minimum written down before you start. Now to that fund manager. And he was harder about it. If you don't if you can't afford to do something, don't do it. Right. If you've made that mistake, take the loss and move on. Like you can't live on margin and crush your fingers. That's not a strategy. So I always caution people to talk to their financial advisor and make sure that you have, you know, you're not going to ruin your retirement savings. I mean, this is this is not a game. This is not a casino. This is real. I asked him what he actually screens for in small companies. He said that the answer surprises people. If you're lied to as an investor once, that's one thing. If you're lied to twice, I have a two strike rule. That's it. I'm out. Like, I'm never going back to anything you're doing, whether you're a CEO or a board member. I'm never touching any other stock you're involved with. And you have to have a discipline in investing. That's my discipline. So people first. And I say that, Jeremy, because the project can be great. If you have a terrible person running it, it's not going to work. And one last one, because I asked Bill directly about the people watching this, the ones who hold coin in bars and do not trust paper. Realistically, a person should have ETFs, miners, futures and physical and have all these different things here because each one each one fits a different it's a different tool in a toolbox. You want to build a house, you're going to need a hammer, a saw, a screwdriver, a level, everything else. And that's where these different asset classes are out there. You know, how are you what are you going to do if if gold goes up to or silver goes back up to one hundred dollars an ounce and you have problems where, hey, maybe you can't unload it because the refiners aren't buying, they're turning people away and things like that. And then also, you know, what happens if, you know, two in the morning we get some kind of event that drives prices up dramatically? That's a perfect scenario where the futures you can offload some of these and you can have resting cells out there during the start on started the Russia-Ukraine conflict. Much of the price action in the metals and wheat and oil and natural gas were all happening at night when the conflict was taking place. So two things in there worth chewing on at the top of the silver move. Some people found the refiners would would not take their metal. And a lot of the biggest price action of these last few years has happened at two in the morning when a short is shut and a screen is not. So nobody clips those answers, but they're not exciting. But they are also the only material this week that is still going to be useful in five years. He said that the AI trade is what breaks and he put a date on it. The AI tech trade, for sure. I mean, I've been doing this a long time, longer than I'm going to admit to anyone here on this show. But I will say that March of 2009 to now, that rally is long in the tooth. And we are going to see a sector rotation between now and March. That's my call. And people are going to be less interested in tech, AI and momentum and more interested in value stocks like some of the ones you mentioned at the onset of Newmont and Barrick. All right. So between now and March, we'll hold him to it. So here are two things this week worth watching, if he is right. And neither one got much attention. Now, the American trade deficit widened 24 percent in July to eighty eight point six billion dollars, which was actually better than the eighty billion dollars economists expected. But look at what drove it. Capital goods rose eleven point four percent, the biggest jump since 1993. That's computers, chips, telecom gears, the hardware of the official intelligence buildout arriving by the container load and all of it being paid for with the capital that has to come from somewhere in the 10 year treasury, which sets the floor for what everybody else pays to borrow is close to five percent. Every dollar going into a data center is a dollar not financing a mine. And on where the capital is getting harder to find, Blackstone limited withdrawals from a flagship private credit fund for a second quarter straight. Investors asked for 10 percent of their money back. They were allowed five percent. In fairness to the fund, it runs around seventy seven billion dollars. It reports annualized returns near nine percent since it started. And people who queued over the past two quarters of roughly three quarters of their money inside about 90 days. So nothing's broken quite yet. But private credit lending that happens outside the banking system is now a market of one point eight trillion dollars. And it's been one of the fastest growing corners of finance for over a decade. When a fund that size has to rotate or I guess has a rotation to the exit that shows up first long before anything else does. And one last thing, and this is a most Kitco question I've ever put to a central banker. Now, the United States holds about 261 million ounces of gold. Of course, a lot of you know that on the government's own books, it carried at around forty two dollars and twenty two cents an ounce, a statutory price. Only Congress can change it. Now, at that price, the entire hoard is worth about eleven billion dollars. At the market price, it's well worth over a trillion dollars. So I asked a man who said in 15 years of those meetings, whether an accounting fiction that size matters. Well, you can mark that to market when you're when you're trying to do these calculations. I'm sure most people are very cognizant that the forty two bucks is not the right number. Why not mark to market? You know, I mean, everybody knows what the market price is. You see it every day. So but then I think if you did that, you'd have to live with the fluctuations that would that would happen. And the price goes down a lot. Then you have to say, well, no, we're going to mark to market. So it's always pretty much always better to mark to market and not have the book value misrepresenting what's really going on. So a former president of a Federal Reserve Bank saying out loud that America should mark its gold to market. That is a conversation this audience has been having for years, usually alone. Now, gold spent the week roughly between 40 to 80 and just under forty five hundred dollars. In fact, I think on the spot side today, it just cleared it and finishing pointing a little bit higher. Now, silver held to the mid 60s the whole way. Platinum ran the high 17 to 18, 11. Palladium covered most of the ground, 1320 at the bottom, 460 at 1460 rather at the bottom. Rhodium, which barely trade sat near eighty nine hundred. Every one of them this week ended up higher than it started. And by the time you see this, the August employment report is out. Economists were looking for around fifty five thousand jobs after July went backwards. Both of my guests said that that print decides it. Canadian counter tariffs take effect on the eighth of the month after trade talks collapsed and the United States imposed a 50 percent duties. Consumer prices land on the 11th and the Federal Reserve decides on the 15th and 16th. And one more thing on the calendar. And it came with its own health warning attached. September tends to be a little bit of a soft patch for the gold market. August the last two weeks have seasonally been strong up 13 out of last 15 years. We've seen that closing out today. It'll be higher up. But then you go to September 29th and you go out into October. Gold goes up 13 out of 15 years. Then you go to about Thanksgiving on. It tends to rise up until January. So I like the seasonal tailwinds. Now, remember, past performance not indicative of future results. But I do like the setup where we've had a pullback on a hawkish nerd of Fed. But I do like the way that the data and everything suggests that things will change and the Fed will go from hawkish to neutral to dovish. So it has it has all the makeup and the character there for a nice rally until the end of the year. And the last word goes to him because it is the right note to end on. And definitely don't anchor around whole numbers. You know, I write about things like silver going to 100 and gold going to 5000. But the reality is, is that, you know, the number the price is going to go up until it stops and no one knows where it's going to go. So one of the next four dates decides whether this is still an argument about raising. I'm Jeremy Safran. That was this week in focus. Full conversations are all on the channel and tell me in the comments, which case do you buy the wrong tool to labor market or neither? Be sure to subscribe. We appreciate you for watching. We got some great content coming up all week. We'll see you next time.