Welcome to Money Metals Exchange's weekly market wrap podcast. Helping precious metals investors during these treacherous times. Now, here's this week's market wrap with commentary and analysis from the fastest growing precious metals dealer in America, Money Metals Exchange.
Welcome to this week's market wrap podcast, I'm Mike Gleason.
Coming up we have a fantastic interview with author and investment strategist Michael Pento. He weighs in on the Federal Reserve's inflationary policies and offers his insights into the dangers of holding paper money and bonds denominated in dollars in the economic environment he sees ahead.
But first, this week's market update, and there was lots of action in the precious metals markets – mostly to the downside.
Gold and silver sold off and the stock market rallied as hopes grew that military strikes in Syria could be averted. The Syrian government reportedly has offered to give up its chemical weapons.
Meanwhile, on the economic front, the U.S. jobless claims came in better than expected, showing a decline of 31,000. Those numbers are likely to be revised, and they conceal the fact that the actual workforce participation rate is now at generational lows. But investors reacted to the news by selling precious metals – apparently on the belief that not-as-bad as expected employment numbers gives the Federal Reserve more room to curtail its Quantitative Easing stimulus program.
All eyes will be on the Federal Open Market Committee as it meets next Tuesday and Wednesday. It's now widely anticipated by the mainstream that the Fed will announce some sort of tapering. Even though it hasn't been made official, the news seems to have gotten priced in to precious metals over the past few trading days.
As of this Friday morning recording, gold prices are down nearly 5.5% on the week and currently trade at $1,316 per ounce. Silver has gotten hit even harder, shedding more than 8% to trade at $21.85 as we're doing this podcast.
Not as many of our customers are taking advantage of the correction this time around as compared to the massive demand we saw during the price dips back in the spring and early summer.
Those that are adding to their positions are selecting the lower premium products like silver rounds and bars. The reduction in demand however has allowed Money Metals Exchange to essentially eliminate lead times on all physical silver products – as inventory availability is now the best it's been in months.
Turning to platinum and palladium, they held up better than silver this week. Platinum now trades at $1,444 an ounce, off about 3.5% on the week. Palladium is little changed on the week. It could even finish with a slight gain. Palladium closed last Friday at $703. As of now, it's at $702 an ounce.
As I noted last week, palladium can be a valuable addition to your gold and silver bullion holdings precisely because it doesn't always move in lockstep, as evidenced this week. Palladium tends to be more of an optimist's metal. One of its primary uses is in catalytic converters, so palladium benefits when worldwide automotive demand strengthens or is expected to strengthen.
But in the end, all precious metals and all assets are heavily influenced by what the Fed does. Our featured guest this week offers an alternative perspective on the prospects for Fed tapering and what it may mean for precious metals in the coming months.
So now without further delay, here is our exclusive interview with Michael Pento.
It is my privilege now to be joined by Michael Pento, president and founder of Pento Portfolio Strategies and author of the book The Coming Bond Market Collapse: How to Survive the Demise of the U.S. Debt Market. Michael is a real student of the Austrian School of Economics and has been a regular guest of CNBC, Bloomberg, Fox Business News among others and we're excited to get a chance to have him on with us today. Michael, thanks very much for taking the time to speak with us and welcome.
Thanks for having me, Mike.
We've been following you for several years and there's a lot I'd like to cover with you today but start out by giving our listeners who may not be as familiar with you a little background on yourself, your philosophy and what brought about your way of thinking. And perhaps, more importantly to our discussion today, how that influences your investment strategies?
Well, basically, comes down to this. Do you believe the free market is the best arbiter of price determination or do you believe the government has the better handle on that. So if you believe like I do that market should be in charge of things like the cost of money rather than appointed individuals that have no accountability then you tend to gravitate towards Austrian economics. If you do believe in markets, then you'll see a lot of these problems would never have occurred and if they were to occur, they get resolved much more easily.
Well, we certainly do live in interesting times these days and I've heard you and others say it's all about the Fed and their monetary moves in today's investment world. With that in mind, I want to dive in on what's happening with the Fed policy current lean. Now, I assume that you're probably like us and that you've stopped wasting your energy worrying about what the Fed ought to be doing as a proponent of Austrian economics, because that appears to be a losing battle in a world run by Keynesians, and you have probably spent more mental energy on what they will do or what they are likely to do and look to use that to your advantage as an investor and portfolio manager.
Well, Mike, it's very hard. It's just extremely hard to try to read the mind of an entity that seems to be bipolar. There are times when there's weak economic data where the Fed says that the amount of monthly MBS (Mortgage Backed Securities) purchases that are currently $85 billion worth of counterfeiting every month. There are times when they said they're going to increase that. And there are times when the economic data is rather strong when they say that it's time to start tapering, so you really have to understand that the bond market is in a bubble and the free market has already started to taper for the Federal Reserve. You have rates that were one and a half percent on the 10-year in May. They've gone to almost three percent as we speak today and I think they go to about four percent in Q1 of 2014 and at that point where we see the economic data come out, the profoundly weak and that will send us back into a recession and it's at that point that I think the Fed ends all of the tapering talk, or if you will, tapers the tapering talk.
I want to expand on what this will ultimately mean for the U.S. dollar because obviously the saving grace is the fact that we've been the world's reserve currency and you've indicated that the next bubble that bursts U.S. bond market is going to be worse and more dramatic collapse than the last two asset bubbles that burst. Talk about that and the ramifications that this potential event will have on the U.S. dollar and other fiat currencies as well.
Awful lot to answer in that one question and I could probably take about three hours to answer that question but basically the credit currency and inflation risks associated with owning U.S. Treasuries is off the charts. Let's just look at the credit risk. The credit risk of the nation is at an all-time high. We have $17 trillion in national debt. We have $54 trillion in aggregate debt if you count public and private sector that it's a 107% of GDP, 700% of our annual revenue. So really, the average interest rate is on the 10-year note is 7%, a little above that since 1971. It's now trading, like I said, just below 3%. If you just look at the credit risk associated with the sovereign debt, we should be trading at well above the average of 7%. But we have an addiction to cheap money, artificially produced low interest rates and inflation so as we get gravitate towards that as we approach mean reversion and interest rates, I expect us to fall back into a recession.
If that's the case then I think the Federal Reserve stops doing their tapering talk, instead of saying what they used to do for years is control the level of short-term interest rates, the so-called Fed Funds Rate or Interbank Lending Rate. That's at zero so there's nothing really they can do as far as that range is concerned. They then gravitated towards Quantitative Easing and now we have a new metric of how much monthly asset purchases they'll do and that'll be their new gauge on how to conduct a monetary policy. I think that we are well on our way of creating many asset bubbles, not just the bond bubble. You have home prices that are up 13% year over year. The stock market is up 18% year over year, money supply is up 7% year over year. We have 0% interest rates for five years now and running. It'll be that way for probably at least seven.
The monetary base are going from $800 billion to $3.7 trillion. There is a bubble in student loan debt now. The auto loans, 36% of all auto loans are sub-prime in nature. You have to ask yourself, what condition have we solved since the great recession began in December 2007? We haven't solved anything. We've put all of those conditions on steroids. That's going to eventually lead to the inflation part of that dynamics. The credit currency and inflation risk and currency inflation risk go hand and hand. We'll start getting a huge increase in inflation as the money supply continues to grow based on these asset bubbles that are going to be going worse and worse, stock, bond and real estate. Then, I think you'll see a collapse in the bond market sometime around 2016 and by collapse, I mean more or less mean reversion, but that will be a collapse from 1 ½% to 7%.
To cause a total collapse in the price of bonds which would send the dollar lower and I think that would really boost all asset classes that are hedged towards inflation. And it'll be at that point that I think that the Fed have a watershed or dramatic decision to make, do they want to go from manipulating the Fed Funds Rate to what they have done now which is adjust the amount of monthly counterfeiting. Two, the big quantum leap then would be we will put a cap on interest rates. In other words, we will say the 10-year note will not go above 7%. I think that's the choice the Fed has to make, they will either face a runaway inflation, hyper inflation or they will allow a deflationary collapse of the economy. I can't read the mind of whoever is going to be the head of the Fed in 2016 but I think that's unfortunately the decision they face and the decision that America faces, we face.
Well, with all that said and expanding on the inflation talk, in a world that's seemingly on the brink here, where do precious metals come in? What kind of role should they play, not just an important investment asset but also as a means for an investor to protect themselves against the paper currency devaluation?
Well, right now they play the role of a buffoon. If you look at what gold has done in the past year or so and then particularly, the mining shares, it's been nothing but torture to own these investments. I own some of them as insurance because I can assure you that this is not going to end well at all, but I think the epiphany moment is going to come when the increase of interest rates which is already occurring and is already putting pressure on the mortgage market. Mortgage applications were down I believe 13% last week. You see refinancing go away and the duress put on the economy from the renewed weakness in housing because of the rising interest rate will, in my opinion, cause the Federal Reserve to abandon tapering. I think that's the moment that we're looking for here. That's the moment when gold stocks and mining shares in particular, silver and gold, will really soar.
Once the Fed gets a sense to the notion that the normalization of interest rates cannot be allowed to occur without the economy going back into a recession, and when I say normalization of interest rates, I don't mean 7%, I mean just the interest rate where it is today, 3% perhaps 4% on the 10-year note, is enough to send the economy because of the bubbles that we've created and debt levels we carry, that interest rate alone is enough. When the Fed gets a sense for the notion that they've made themselves have made the economy addicted to cheap money, addicted to inflation, addicted to low interest rates, then that is when these gold stocks are going to soar.
Do you ever see a return to a gold back currency? Do you think that will be forced on these monetary officials at some point?
Well, I think we will but it's not anywhere in our imminent future. I think that, as I said, remember I took us out to 2016, sometimes around that time frame. And believe me I don't have a crystal ball as you're aware, I'm not a God obviously. I pick a date because I just do the math behind the amount of interest we're going to pay on our debts. Our debt service as a percentage of revenue, so I do those kinds of metrics, and I look at 2016, how it all plays out. But no one knows the exact date but there's going to be a time in this nation where the Fed is going to have to decide, do they abandon the manipulation, this Keynesian manipulation of interest rate and the economy. Do they allow the economy to collapse into depression, which is where we're headed eventually, or do we try to perpetually inflate our way out of a problem caused by inflation? I don't know how this is all going to shake out. That's why I run a dynamic portfolio and Pento Portfolio Strategies. I try to model the difference between inflation and deflation because I think there's going to be dramatic swings between the two going forward.
Well, in closing here. Please talk about your book, The Coming Bond Market Collapse, which came out earlier this year. Talk about why it's such an important subject and exactly what people will learn when they read it because I know you spend a portion of the book discussing strategies that they can take to protect themselves against this bond collapse.
Well, Mike the reason why I wrote the book is because a big proponent of the United States, a big proponent of the middle class, I think you can have a sustainable nation without a vibrant middle class. I saw what happened to them in the tech bubble in the late 90's, I saw what happened to them when they suffered the real estate collapse in the middle of the last decade, and then I realized that the biggest bubble we've ever created is the bubble in U.S. sovereign debt. And if I can protect somebody's retirement by going through, and the book exhaustively explains how the bubble is created, it describes how it's going to burst, when it's going to burst. It goes through historical examples of past sovereign debt bubbles and what happened during those times, so if I can save somebody's retirement by getting them out of a bond fund and preparing them for what I feel is going to be, as I said, dramatic swings between inflation and deflation going forward. I think then, I did a really good and useful purpose on this life.
Well, excellent. We definitely urge people to check that out and we really appreciate your insights and thanks for being so generous with your time. I know you're a busy guy. I hope we can maybe do it some time again in the future as this all unfolds.
Thank you so much for having me, Mike.
To get more info on Pento Portfolio Strategies, please visit Pentoport.com. Or to order a copy of Michael's fantastic book, The Coming Bond Market Collapse: How to Survive the Demise of the US Debt Market just go to Amazon.com or you can find info on that book as well at Pentoport.com.
Well that will wrap it up for this week. Don't forget to tune in next Friday for our next weekly market wrap podcast. Until then, this has been Mike Gleason withMoney Metals Exchange. Thanks for listening and have a great weekend, everybody.
Thank you for joining us for this edition of the Money Metals Exchange Weekly Market Wrap. Be sure to come back next week, and don't forget to subscribe to our weekly podcast through iTunes. For answers to all of your questions, or to discretely and securely buy or sell gold or silver coins, bars, and rounds, call 1-800-800-1865. Our knowledgeable and no-pressure specialists are standing by between 7:00 a.m. and 5:30 p.m. mountain time, Monday through Friday. Visit us at www.MoneyMetals.com or call 1-800-800-1865.
About the Author:
Mike Gleason is a Director with Money Metals Exchange, a precious metals dealer recently named "Best in the USA" by an independent global ratings group. Gleason is a hard money advocate and a strong proponent of personal liberty, limited government and the Austrian School of Economics. A graduate of the University of Florida, Gleason has extensive experience in management, sales and logistics as well as precious metals investing. He also puts his longtime broadcasting background to good use, hosting a weekly precious metals podcast since 2011, a program listened to by tens of thousands each week.