let's talk about everybody's favorite subject gold now the russians are using gold in some
unique ways and some new ways and some people mean that means the ruble is now gold-backed and
no no if anything it's the absolute opposite so some quick backdrop uh gold
reserves in russia are different than they are in the rest of the world
so most countries have some gold in their currency reserves and the idea being that
they can buy or sell gold into in order to help regulate the availability and the value of their
national currency now russia does this too and it has about 135 billion dollars in gold reserves
but that's only the beginning of what it has uh russia officially is the world's third largest
exporter of gold and uh that comes out to about 17 billion dollars of bullion annually at current
prices but they're definitely doing more than that because they have an unofficial state reserve of
gold that they don't share the numbers with that's independent from the currency reserves
and they also have a partially processed reserve that the state manages that it would allow
them to put the semi-processed gold ore into a purification process and very quickly get some
more they also use gold to kind of go behind people's backs and stir up trouble around the
world that's one of the ways for example they pay for the wagner group and in doing so they
can bribe militants or pay off governments in order to get their way so there's a lot
more gold sloshing around in the russian system than that third in the world and the 135 billion
dollars would suggest so let's start without his background let's talk about this idea of gold
as currency what has happened with the ukraine war is that the sanctions on russia are now the most
extreme of any government in human history in fact you could easily make the argument that russia
is now under greater sanction than all other countries in history combined it's pretty intense
these do not just apply to things like their exports it applies to the russian central bank
itself so if the russian central bank wanted to engage in normal operations and exchange currency
back and forth to facilitate trade they really can't in the normal process now because they can't
access any transactions in u.s dollars canadian dollars australian dollars taiwanese dollars
korean won japanese yen european euros swiss francs and british pounds and i know i've left
out a few it's pretty intense it's by far the most in history so what the central bank has done
in order to prevent the currency from going into absolute free fall is they've issued a series of
capital controls that are very tight so if you're a russian exporter and you earn dollars or euros
or one or anything else the second your money comes back into the country for payment you have
to surrender it to the russian central bank which will then issue rubles at a rate they determine so
russia's recovery in the ruble rate because we've seen it drop and then come back up almost where
it started isn't because it's doing well or because it's gold back that's asinite
no it's doing it's back to where it was because there's no alternative and every little bit of
the russian economy that is linked to the outside world all the ability of the russian system to
earn hard currency is now being sacrificed at the altar of saving the ruble from collapse
this has a number of side effects none of them good but the most important one is if
you are a russian company and you have any assets around the world you now have no hard
currency to do anything with them and in many ways this was the goal to make sure that russian
companies are focused entirely on the russian economy itself so how does goldfield in here
well it's not too complicated normally if you want to buy something from abroad you have to pay for
it in the local currency which means you have to get some of the currency so you sell some rubles
you get some for example south african rand you pay the south africans then the good comes to you
they can't do that right now but they still have to import so they what they do is they literally
fly a plane full of gold you see gold is not backing the ruble gold is for all intensive
purposes the new russian currency for purposes of intergening if participating in international
exchange the ruble's still there weak and crappy as it's always been sitting by itself nobody wants
any in fact there's now a contest between the russian central bank and the russian citizens
about who can get rid of their robo rubles and buy gold instead because nobody wants rubles so
it's the opposite of gold backing the currency if anything gold is undermining the currency
because now it's being presented as an option as an alternative and if you're not in russia and you
want to deal with russia gold is what you're going to get because you don't want rubles how long can
the russians sustain this maybe longer than you think that 135 billion dollars of gold they have
in their currency reserves that's enough to cover six months of normal import cover for them and
imports are not normal anymore because of all the boycotts so it can probably stretch twice as long
and then the russians can tap their emergency reserves and we don't know how long that'll last
so bare minimum the russians can fly with this sort of system for a year now the sanctions may
move that number around a little bit because they're getting stricter and stricter by the day
we now know from satellite photos that the russian massacres in bucha were not just in bucha
they appear to have been in every single community the russians have occupied for the last five weeks
and to think that there won't be a new sanctions regime or more countries joining the sanctioned
regime in that sort of environment i think is a bit optimistic but there's also not a lot that
people can do against gold if countries are still willing to trade because it's untraceable this
isn't like conflict diamonds where you can put it under a microsoap and look for unique chemical
signatures gold is gold as gold it's 100 pure or it's not and that makes it really good for
getting around sanctions as long as you're dealing with a country with absolutely no moral compass
of which there are a bunch okay that's it from me uh the people need to take into account is the
fact that maybe the only asset that the russians have that they can turn into cash right now
is gold gold is fungible uh gold could be sold by the russians to as an example people in dubai
and be rebranded as dubai gold now maybe the russians would have to take a discount
and i'm certain that the russians don't want to sell their gold but i think the russians might be
putting themselves in a circumstance where they where what they want is somewhat less relevant
than what they could have uh and i think the i i think gold holders need to be considerate in
the next six months about the possibility that the russians have cash needs in terms of consumables
and imports in their society that they can't fund through normal commodity sales which would settle
in u.s dollars the most obvious alternative particularly for imports from china and india
would be gold and that might put pressure on the gold price and i think that people who uh
get their sense of value around gold from the price quotes day by day
and would be overly concerned about a fall in the gold price from say 1950 to 1750 need
to consider the fact that that's a possibility given russia's cash needs in the next six months
if we look out further uh i i think both the interest rate challenge
and the russian challenge are easy to overlook uh easy because i think that on a global basis
the economy of the world but in particular the us economy can't stomach higher real interest rates
for any length of time we've talked about this before done again but let's do the arithmetic for
people who haven't heard about us talk about that traditionally the us 10-year treasury the world's
benchmark security uh has offered a positive real yield with depending on which government
agency you listen to the depreciation of the value of the us dollar being between six and
a half and seven and a half percent and the u.s ten-year treasury yielding two percent the real
yield on the us 10-year treasury is a function of taking two and subtracting 6.5 a truly ugly number
uh if we were to revert to me in terms of pricing of the us 10-year treasury
then the interest rate would have to rise to six and a half or seven can you imagine the impact of
the federal state and local budgets of a tripling or quadrupling of their interest charge can you
imagine the impact on consumers if their credit card interest rate doubled can you imagine two
if the 30-year fixed mortgage rate returned to mean because the 30-year fixed mortgage rate
has traditionally trade traded at a premium to the 10-year treasury rate
if the 10-year treasury rent went to seven that would suggest that the
30-year fixed uh mortgage would have to trade at eight imagine what that would do to housing
affordability the point of this soliloquy isn't all arithmetic is to say that the probability that
the policy makers can make substantial interest rate hikes stick is in my opinion nil there could
be a near-term impact on gold if the nominal interest rates go higher uh but i don't believe
that the policymakers will be able to afford an honest economy an honest interest rate environment
for the next five years and the consequence of that is that from my point of view
there is a strong probability of higher gold prices when people ask me why this hasn't been
reflected to the market i ask them to reflect on history perhaps because i'm older than most
of your viewers that's easier for me because i live through history but i remember although
i was only in high school in 1967 1968 the writing was on the wall for higher inflation
we had the war in vietnam which of course we lost in the war on poverty which we lost to
and we had a circumstance uh in the 1960s where we were living beyond our means
and we began to inflate away the difference between our obligations and the net present
value of our servicing capabilities through inflation but the consumer didn't pay attention
the consumer had lived through the 1950s and most of the 1960s which were very benign economic times
and the consequence of that is that the academic subject of inflation
didn't attract any action until the consumer had lived through three or four years
of inflation until despite the fact that he or she were getting pay raises their
standard of living was declining as a consequence of the deterioration
of the purchasing power of the dollar and i see the exact same thing happening now
voters and consumers have lived through the 40 most benign economic years in the history of
mankind between 1982 and 2022 and the consequence of that is that confidence in the economy
confidence in the system is extraordinarily high people look at the price of gas at the pump and
they say oh well that's russia uh they look at the price of bread perhaps they say oh that's russia
perhaps they don't know who to blame but after 40 years of benign economic circumstance
uh they think that six and a half percent deterioration in the value of their savings
is an interesting academic anomaly it's not it's a threat to your listeners well-being
and as that threat manifests itself over two or three years the confidence born of 40 years of
benign economic climate will be swept away much like it was swept away in the later part of the
decade of the 60s in the early part of the decade of the 70s i would ask people too to consider
uh past precious metals bull markets and the performance of these bull markets although
from trough to peak these markets were extraordinary 35 dollars to 950 850
pardon me uh in the 1970 to 1982 bull market 250 to 1900 in the 2000 to 2012 bull market
in both markets there were periods of volatility where the market declined by 25 or 30 percent
and certainly in the case of the 1970s bull market there was a hiatus in the middle of the market
that saw the gold quote decline by 50 percent without derailing the bull market the malaise
that we have exhibit have seen in the gold bullion market and certainly the gold equities markets in
the 16 months probably ending two months ago while it tested the shareholders patients and metals
holders patients is certainly consistent with the occurrence of similar periods of gold weakness
in prior bull markets and your listeners need to familiarize themselves with that history in order
to understand the circumstance that confronts them today and in order to to chart their own
response to the markets that they see themselves in this time passing zero seven zero four zero
you