Gold and Commodities Make A Bold Move
Eric King – King World News
Stephen, I know you’ve had a chance to review all four of the charts in the King World News article that talked about gold and financial sadomasochism. These are really incredible charts from Peter Boockvar that highlight gold in the 1970s and how interest rates were rallying the entire time along with gold. And people don’t think that’s possible but it’s exactly what happened back in the mid-2000s. We saw interest rates go from 1 on the FED funds up to 5.25. Gold was rallying the entire time.
What’s interesting today, as we’ve had since 2019, a collapse in interest rates. Obviously, we’ve seen it collapse down on the FED funds all the way to near 0% and yet the price of gold has had this big correction and so has silver. The 4th chart though, had to do with silver versus the S&P 500 and how undervalued it is historically versus the S&P 500. Having looked at those charts, go ahead and talk about anything you want. Also, feel free to reference those charts, which are quite interesting.
Dr. Stephen Leeb, Ph.D.
I think the charts are wonderfully presented. And I think that they do tell a story and what they confirm for me is that the behavior of gold is very, very difficult to explain. I would go a little bit further- and say that since the 1970s you had a massive movement in gold and commodities. I recall that during the time when OPEC really turned the world upside down by boycotting oil. That led to a cooperation agreement between the Saudis and the United States- where we would defend them under all circumstances providing that they price oil in terms of dollars. This was the dawn of the petrodollar.
The outcome of this was an incredible move in gold and commodities. In fact, I think gold compounded during that decade at about 30% a year. It’s almost incredible that gold went from $35 to $850. In the face of rising interest rates, that’s absolutely true. Also true is that real interest rates, when you subtract inflation from those interest rates, were actually negative for a lot of that time. And that’s very important because once real interest rates are negative, it means that gold is a better investment than the dollar. Why? Because if you buy the dollar you’re losing money. Inflation is tax and it’s basically taking more money away from you than you get by investing the dollar.
The market went nowhere in the 1980s. It was down in real terms and bonds were down. The only way that you could protect yourself from losing money was to hold gold. People were at risk of losing money in the market no matter where they put it. So, everyone started buying gold and it took off like a skyrocket. It really wasn’t until the mid 1980s that gold stocks peaked. They continued to rally very, very strongly into early 1980. However, it was really the surge in commodity prices and negative real interest rates that explained what went on in the 1970s. And that makes what’s happening today ultra odd. Not only do we have negative real interest rates- they are negative in market measures. We didn’t have market measures back in the 1970s.
Market measures of real interest rates are more negative now than they were between 2007 to 2009 in particular when you had the start of the last real bull move in the stock market. Not only are real interest rates negative as the market sees it because there are certain indices, they sell bonds now that reflect inflationary expectations which are higher than bond yields. The stock market is obviously booming but for fixed income investors and real interest rates, the dollar should be going up. And in terms of commodity prices, over the last 12 months or so we have had a move in broad-based measures of commodity prices that have been one of the greatest and most intense moves in the century. To see gold prices flatlining or even down trending under these conditions is totally out of tune with anything that has happened in modern history. It’s crazy to see commodity prices dragging real interest rates into a sinkhole and gold prices not rising a single bit- and you’re going to blame that on crypto currencies? What is currently happening with gold prices cannot be explained by anything that makes either common sense or economic sense.
Eric King – King World News
Stephen, we will come back to gold in a moment, but what about the dollar in all of this?
Dr. Stephen Leeb, Ph.D.
The only correlation with gold to some extent is that with the dollar. It’s quite a strong correlation and you’ll see that through history. Even in the 1970s when the dollar was going down- gold was going up. Again, the historical patterns of the dollar are basically in line with the historical patterns of gold. Otherwise, you simply cannot explain it. In my opinion, the only thing the United States has going for it as a major power to claim hegemony over the world, is the dollar. The United States doesn’t want anyone to take the dollar away from them as the reserve currency because that would take away their ability to sanction. It would leave the United States with nothing left and they would no longer be the largest economy in the world. By purchasing power parity, the U.S. really doesn’t have much to say about the East or West in terms of our military power. This latest move in Afghanistan is going to give Russia and China basically unlimited access to Asia and Eurasia. The United States is desperate at this point to hold onto the dollar. So when I say the authorities in this country hate gold, I most certainly include the western economies and the BIS in that assumption.
We had a similar situation back in 2013, gold prices seemed to go down for apparently no reason. Gold prices are not going down- they are just staying flat- in the face of everything that suggests it should be moving up dramatically. I don’t want to suggest any kind of manipulation but there’s really no other way around it. There’s no other sensible way, there’s no logic to hedging against near record levels of commodity prices across the board. Copper, food, rare earths, and everything that we’re going to need for daily living has been rising dramatically. Meanwhile, gold is just standing there like a wallflower in the corner, that’s never happened in history. Not really something you would expect.
I believe this very strongly, the United States hates gold and views gold as a major threat. I’m not going to say existential threat because it’s inevitable that the world’s reserve currency changes. It really is inevitable for many reasons. And I think that the western economies are even more scared now that the digital yuan will be introduced in February at the 2022 Winter Olympics. China is getting rid of any competition, even the semblance of competition for that digital yuan to be accepted. The digital yuan will be on par with fiat currency ‘paper money’ and all business commerce will have to accept it as a viable method of payment. If you go to a store in China and want to pay in terms of a digital yuan- the business owner will have to accept it no differently than paper money. Right now, China is much more digitally orientated than the United States and they are going to have a tremendous jump on everybody else when they issue this digital yuan. Initially, China plans to use the new digital yuan within their own country.