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Weekly Market Wrap

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New Outlook for Stocks, Real Estate, Gold, Inflation

Money Metals Airs Must-Hear Interview with Michael Pento

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Welcome to this week's Market Wrap podcast, I'm Mike Gleason.

This week, we have a fascinating interview from investment manager Michael Pento. Always popular with our listeners, Pento has some stern warnings about equity prices and a new outlook on gold. We'll hear from him in just a few moments…

Well, after getting energized with big gains last week, the gold and silver markets are trading more quietly this week. Gold is little changed, with prices coming in at $1,318 per ounce as of this Friday morning recording. Silver, however, is showing a bit more strength.

On Thursday prices closed above the $21 level for the first time since mid March. Silver currently trades at $21.14 an ounce, up almost 1% for the week. The other white metals, platinum and palladium, are outperforming slightly and also moving modestly to the upside, with weekly gains of around 1% each. Platinum is up to $1,483 an ounce, while palladium comes in at $842.

Meanwhile, crude oil prices are down about 1% since last Friday, taking some of the fuel out of the inflation trade. But the dangerous situation in Iraq along with other fundamental drivers could still cause oil prices to break out to new multi-year highs in the weeks ahead. If West Texas Intermediate Crude starts trading above $110 per barrel, where it is now near, prices could have a clear technical path to the $140s.

One way consumers and investors can hedge themselves from a potential energy shock is by owning physical precious metals. They are, in a very real sense, a form of stored energy. Think of all the energy inputs required to move the earth, to separate relatively tiny quantities of precious metals from tons upon tons of rock and dirt, to refine the raw ore into pure gold, silver, platinum, or palladium, and finally to mint the precious metal into beautiful bullion coins, rounds, and bars.

All that energy is represented in tangible value you can hold in your hand. In fact, the average all-in production costs for gold and silver are nearly as high as actual spot prices right now. And in some cases, mines are producing at a loss. Today there is virtually no speculative premium on gold and silver bullion, assuming of course that you buy common bullion items and not heavily marked up numismatic or proof coins or other gimmicky products.

Precious metals are a form of stored energy, and silver in particular has practical applications in the production of energy. Silver is used in many types of batteries, including the ones that power smartphones and electric vehicles. Silver is also used in solar panels, a source of demand that is estimated to come in at 100 million ounces this year – more in the years ahead. Solar is the second fastest-growing energy source in the world. And although solar is far less efficient at generating power than fossil fuels, solar enjoys government subsidies and will become more competitive in its own right as prices for oil and natural gas rise. More demand for solar panels means more demand for silver.

Now is a great time to bolster your reserves of this form of stored energy, while it can still be had at bargain prices – and before the next oil shock hits. All of Money Metals' silver bullion products – from fractional tenth-ouncers all the way up to 100-ounce bars – are currently available at low premiums and with no delays on order fulfillment. In fact, we are today announcing a special on all fractional gold and silver products. If you buy just $1,000 of these items from ILB, you get a tube of 20 one-ounce copper rounds for free. Buy $5,000 or more, and we'll also throw in free shipping and insurance on your entire order!

And finally, before we get to this week's interview, you may have heard about a draconian new law aimed at foreign account holders that takes effect on July 1st. Known as FATCA, the law is already causing thousands of foreign accounts held by expats and offshore investors to be closed. The U.S. government is able to enlist foreign banks to do tax reporting for the IRS because of the de facto dollar standard in international finance. Financial institutions that don't want to deal with the compliance costs and risks are simply blacklisting U.S. customers and refusing to do business with them.

Some popular types of electronic precious metals accounts that feature bullion stored in overseas vaults may be subject to FATCA and other reporting requirements. However, reporting requirements for sales of physical bullion to our U.S. customers remain unchanged. In almost all cases, when you buy from us, we don't – I repeat, don't – file any reports with the IRS or other government agencies. You can learn more about the extremely rare instances when purchases or sales of precious metals must be reported by navigating to the Reporting page on our website – but, such a requirement has only been triggered in roughly one transaction out of every 20,000 we conduct. The fact is that physical precious metals remain one of the few asset classes you can own discreetly outside of the government's growing financial surveillance reach.

And now, without further delay, let's get right to this week's exclusive interview…

Gleason: 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 an investment advisor who ascribes to the Austrian school of economics, and he's been a regular guest on CNBC, Bloomberg, Fox Business News, among others, and we're excited to talk to him again today. Michael, thanks very much for speaking with us, and welcome back.

Pento: Thank you very much for having me back.

Gleason: You've always had a lot to say about the bond market, and you follow it probably closer than anyone we talk to, so what's happening with treasuries right now, and, more importantly, what does that data tell you about the health of the financial markets and the overall global economy?

Pento: Well, we really don't have markets anymore. We used to live in a world where markets were controlled by individuals, millions of them, competing amongst each other to find something called price discovery. Today we live in a world where asset prices are determined by central bankers competing amongst themselves to see who can wreck their currency the most, who can provide the lowest interest rates, and who can print the most amount of money. So all asset prices across the globe are manipulated, and that, of course, includes bond prices, which are at record highs and record low interest rates, and I don't think that's going to change until we get persistent inflation, which is now 2.1 percent, as measured by the CPI here in America.

We got inflation problems creeping up really in many developed countries and emerging markets, or we have a problem with the solvency issue, where you see the massive expanse of central banks' balance sheets and a massive increase of sovereign debt issuance, and inflation and solvency risks will cause a collapse in bond markets in the developed world in the very near future, and that's the fat tail that nobody's talking about, but it is coming, and it will be devastating.

Gleason: I've heard you going on record saying that you think the equities market is in a very precarious situation as well. Talk about what you're seeing there as we move into the middle part of the year.

Pento: Well, we have a massive disconnect from what I see as market capitalization, as compared to GDP. We just had a negative GDP print for Q1, and they blamed it on the weather, but we had a -2.9 percent annualized GDP print for Q1, 2014. Now I will submit to you, if a few snowstorms can dive the economy well into the negative territory ... In fact, it was the weakest GDP print outside of a recession in 58 years, so we have a very weak economy, we have very anemic revenue growth, and yet we see this huge bubble developing in equity prices, so those two things, those disconnects, will have to reconnect in the future, and I believe that means that this over-leveraged, over-margined stock market will take a massive hit, and I think it's going to happen as soon as the Fed ends QE. The last two times they ended it… there's QE1, 2, and 3, so that's the official version of QE ... version. QE1 ended; we had about a 15% drop. QE2 we had about a 17% drop in the equity market within three months, and now the equity market is so much higher as QE3 is ending; it's really QE4, but it's officially QE3, as the Fed deems it, and I think we're going to have at least a 20% correction when that ends, and it's going to end in just a couple of months.

Gleason: What about real estate? For many Americans, that's where most of their net worth is tied up. What effect does all of this have there, given the tremendous amount of debt financing there is in real estate? Is that a safer place than equities?

Pento: It was a safer place in 2009 maybe, or 2010, when the bubble burst, and the prices dropped 40% nationwide, but now they're back up again. You could turn on the TV again and, amazingly, it's Flipping Vegas or Flipping San Francisco; covenant-light loans are back in style. You see a 30% increase in home prices year over year. This is unbelievable. This is worse than 2007 and 2006, the increases in year-over-year home prices, so it's all pegged upon these artificially produced low-interest rates, and when that ends, you're going to see another debacle in all assets, in particular bonds, stocks, and real estate.

Gleason: With respect to gold, what are you looking for there? What type of opportunity do you think there is in that sector after a couple of rough years, and secondly, what do you think would happen to the metals if we do get a big collapse in equities like you predict?

Pento: Well, I look at the situation in gold ... Let's just go back, say, a dozen years or so, maybe 12 years. You had this huge run-up in the early part of the 2000s, from $250 to $1,900. Then you had a nice consolidation here around $1,200, $1,300 an ounce. Let's look what is happening now and why I think it's time ... and I am not a perma-bull on gold. I am on record being mostly out of gold in the last few years, but I've started to accumulate more and more.

In fact, Pento Portfolio Strategies recently increased its allocation to gold, and I'll tell you briefly why, because debt levels have exploded across the world, alongside with the balance sheets of most central banks. In addition, real interest rates are profoundly negative. Now that's the rocket fuel for gold, is profoundly negative interest rates, and on top of that, we see central banks that aren't concerned about the negative condition of interest rates. In other words, you look at the nominal rate and subtract inflation, and they're saying, "Guess what? Inflation isn't high enough. We want more inflation." So that's going to send these negative interest rates further into negative territory. Inflation is now, believe it or not, is the stated goal, the avowed goal of most governments across the developed world.

Most importantly, recently achieved inflation targets set by the Fed are being completely ignored by the world's most influential central bank. Have you ever conceived of a notion where a ... ostensibly speaking, the protector of your currency would actually go on record saying, "We have an inflation target of 2%; we're now above that, as measured by the CPI," not Michael Pento's inflation gauge, the Consumer Price Index year over year ... 2.1%. They've achieved their target, and they're completely ignoring that they've reached their target for inflation, and you add a little icing on the cake is that recent reports show that China is a massive manipulator of the price of gold. In other words, it was reported by Bloomberg that 15.2 billion dollars in phony gold ownership was avowed to vastly increase access to Chinese credit, so these people need to go out now and buy real gold instead of fool's gold. So there's a huge tailwind to gold. I think it's going to enter another bull market.

Now the exact catalyst ... I can't give you a date, but I can tell you this: we had a ... as I mentioned before, profoundly negative GDP print for Q1. You look at the Q2 data, which remember was supposed to have a 4% annual rate in Q2, Q3, and Q4. Even if that's achieved, we have a 2% year-over-year growth rate in GDP, but I'll tell you this: if you look at industrial production, if you look at durable goods, and you look at other key metrics that I'm measuring, GDP will again disappoint in Q2 and go further down in Q3, so there is no substantial rebound in U.S. GDP, and that means that the Fed is not going to be able to get out of QE completely, the Fed is not going to be able to raise interest rates, and that sends interest rates in real terms further into negative territory, as I've predicted, and that is the absolute perfect explosive cocktail mixture to send gold back into a massive bull market.

Gleason: It certainly does seem like the Fed is painted in a corner here, doesn't it, and negative real interest rates are probably here for good, and, like you said, that is a fantastic setup for precious metals.

Well, excellent, Michael. We really appreciate your insights, and thanks for being so generous with your time, and we definitely hope we can do it again in the future. We always enjoy talking to you.

Pento: My pleasure.

Gleason: To get more info on Pento Portfolio Strategies, please visit pentoport.com. That's P-E-N-T-O-P-O-R-T.com, or order a copy of Michael's fantastic book. Once again, the title is “The Coming Bond Market Collapse: How to Survive the Demise of the U.S. Debt Market”.

Well, that will wrap it up for this week. Thanks again to Michael Pento. Be sure to tune in next Friday for our next weekly Market Wrap Podcast. Until then, this has been Mike Gleason with Money Metals Exchange. Thanks for listening, and have a great weekend, everybody.

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