I'd love to dig in today and talk about, you know, where do you see gold going?
Because it seems to me like with all the money
that's been printed, it feels like it's it's been suppressed.
Yeah.
Gold is now responding to the debt load that the world has today.
Like it should.
It has underperformed a bit
because interest rates have been low for the last ten years, abnormally low.
Now we're going into a more inflationary environment, of course.
And what's happening is inflation's driving the bus.
The Fed's reacting to inflation, Other markets are reacting to the Fed,
the dollar is reacting to interest rates, other currencies
are reacting to interest rates.
So it's all interconnected, but it's not quite a straightforward to understand.
So just take it one step at a time. Can I do that?
Yes, please.
Yeah, I think.
Take us all, like literally of your teacher in a class.
It's going to be a couple of minutes, but basically inflation is leading right now.
So for the first time we have inflation in 40 years and the Fed
is reacting to inflation by raising the interest rates.
And the reason they're doing that is to slow down demand,
to take the pressure off of the pricing
that is happening because there's not enough goods to meet demand.
Now, usually that's because the economy gets overheated.
This time it's a little different because the supply side
has been interrupted by COVID, a supply chain disruptions,
plus all the stimulus money created excess demand.
So for for COVID and the government's reaction to it,
the simplest way I heard how did they explain to me
was basically we paid a bunch of people not to make things
and we gave them about your money while they were sitting at home on their bonds
and they spent the money.
So there is less goods and more money, and that's helped to spur inflation.
So the Fed is raised rates and they've raised rates
higher and faster than every other country.
And the U.S.
economy is doing better than most other economies.
Japan, China is not doing very well right now, primarily because of COVID.
Europe isn't
in trouble because of the Ukrainian war.
So inflation is is hotter in other places and the economies around
the world are doing less well than we are, even though we're not doing that great.
So what's happened is that all the money from around
the world is looking for a safe haven.
So it's coming to the U.S.
because you can get a better, safer return here for your money.
Well, the gateway to do that is through the dollar.
So if you're in Japan or in China or in Europe, you've got to buy dollars
to get into our treasury market or to get into our stock market.
And that's pushed the dollar way up, which is in turn
pushed gold way down through last fall.
That's because the dollar and gold tend to trade inversely to each other.
Why? Well, most of the gold
around in the globe is bought outside of the U.S.
but gold is priced in dollars.
So when the dollar becomes more valuable, gold
becomes more expensive and other currencies.
And that's what has made gold cheaper in the U.S.
through last fall.
The dollar was really strong over the last year.
In fact, from January of 2022
to October of 2020 to the dollar was up
18% against most other major currencies on average.
This is a gigantic rocketship moon for currencies
in only two, three, 4% in a year is a lot.
And it's all because of what I just explained.
So what's happened now is the Treasury yields here in the U.S.
have gone up as well.
The Fed's raised the the Fed funds rate from, what,
25 basis points to four and a quarter four and a half basis points lop the highest,
sharpest rate hike they've had in 20 years or more.
And they've raised the bond yields up from,
you know,
very low to three and 4% for the ten year
Treasury, the 20 year Treasury, even the two year Treasury.
And what we've seen is the biggest bond
yield inversion that we've had since 1980, 1981.
Actually, when we went through a similar high inflationary period.
So the two year Treasury right now is paying the yield is about 4.2%.
We're the ten year Treasury and the 30 year Treasury, about three
and a half to 3.6%.
So that differential is a negative inversion or it's an inversion rather,
and that is a signifier of a potential recession
and it's a very accurate signal signal of a recession.
So all of this is creating a big flux in everything.
Currencies fluctuating against each other, inflation spiked.
It's coming down now.
And I do expect inflation to moderate some because everything
the Fed is doing by raising the rates is slowing demand down.
And the disrupted supply chain that we've had is starting to ease.
So we're going to see you've seen inflation come down from 9.1%
last summer to six and a half percent as of the December print.
It's falling, but it's probably not going to fall a whole lot below
five or maybe four and a half percent by this spring.
And we talked about
why when we had lunch a couple of days ago, it's because of rents,
which are 40% of the consumer price index and they're slow to reset.
And you've got your finger on the pulse for rents.
I mean, you you know,
what's happened over the last year or two, they've gone they've gone way up.
So inflation's going to stay up, but not it's going to come down some.
But all this has made everything really, really
confusing to most people on the street who don't follow this every day.
Like like I do or in your sector, know of the cost of financing
and you know what kind of return you can get a real estate,
which is one of the best investments you could ever have.
By the way, you know, we are the strongest economy right now,
so there's a lot of dollars flowing into it.
And so that has created a strong dollar which is kept gold low.
What does that do to other currencies?
Other currencies have lost value to the dollar,
and that's made gold more expensive in those currencies.
So when gold was down about 12%, 13%
in October,
no gold was up the same eight, ten, 12%.
In other currencies, whether you were in Japanese yen or euros or British pounds.
So that's starting to narrow a little bit because gold is up
actually higher than where it started 2022 by about $100.
Right now it's up 17% in the last three months.
And it's because the bond yields are starting to fall.
If you look back, every time we've seen a rate hike
cycle peak, but they've signaled that they're going to hold rates higher
or hold them for longer than people think because they need to snuff out inflation.
When we see a rate hike cycle peak and bond yields,
that's typically a bottom of the market for gold.
And when the yields start to fall, gold tends to react positively
because gold doesn't pay a dividend
like or a yield like bonds, you are just an asset that goes up and down in price.
So the opportunity cost for gold is diminished
when yields are higher and with the yield start to come off, that tends
to signal that, hey, things are changing and it's good for gold.
And in the last five or six times we've seen a rate hike cycle peak
that signaled a bottom for gold and a rise that we've now seen a pretty good one.
But it's not over yet because
rates could fall further.
The bond market is calling the Fed's bluff
basically right now because yields are falling in the bond market,
even though the Fed says it's going to hold rates up for those listening
that maybe don't know, like what is the bond market like?
How is that measured? Well, the bond market is a credit market.
It's the biggest credit market in the world.
If you're going to loan money to the U.S.
government, they're going to do that in the form of a bond.
And they're going to pay you interest.
So the amount of interest they pay you is the yield.
So you can give the government,
say, $10,000 on a ten year treasury
and you're going to get 3.6% right now
over those ten years, which isn't a very good investment.
Well, as yields
now the value of the what you pay for that bond when you buy it
is a net.
Some of that $10,000 plus the interest, you understand.
So the bond, you're actually paying less than 10,000 to get the bond.
So there's a price for a bond and a yield on a bond.
And what tends to happen when the yields go up,
the price goes down
because you still need to get to that net sum at the end.
Now, when the yields start to fall, the price of a bond goes up.
So that's why when we see the market is is gaming the Fed right now,
because what's happening is
even though the yields are falling, the value of those bonds are going up.
So you could actually make a ten or 15% return
on a treasury in a year or two if the yield falls from a peak.