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Trade War with China Could Tank Dollar, Send Inflation Skyrocketing
Federal Reserve Hikes Rates, Believes It Can Control Expectations
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I’m Mike Gleason and welcome to this week’s Market Wrap Podcast.
Coming up we’ll hear part two of an interview with Money Metals president Stefan Gleason during a recent 360 Gold Summit. Stefan gives some important warnings to precious metals investors, discusses why he favors one of the precious metals over the others and also talks about some really important things to consider when selecting a precious metals dealer. Don’t miss the fantastic conclusion of Stefan’s interview, coming up after this week’s market update.
Downside volatility in the stock market sent investors fleeing for safe havens this week. The Dow got rattled to the tune of nearly 1,000 points as fears of global trade wars sparked heavy selling in technology shares and industrials.
The selling came largely in response to President Donald Trump’s announcement Thursday of new tariffs on Chinese products. The tariffs will target China’s technology industry and could total an estimated $60 billion.
Some investors fear geopolitical tensions between the two powers will escalate. Chinese President Xi Jinping has increasingly positioned himself as a strongman ruler, culminating in a recent move to make himself president for life. He may now feel inclined to align himself more closely with Iran, Russia, and other U.S. adversaries.
China and Russia have already formed a partnership to bypass the U.S. dollar in oil and commodity transactions. Regional trading alliances that side-step the dollar are expanding.
The other big fear among investors is that the tariffs will spark retaliation against U.S. producers and begin to undo the comparative advantage gains of globalization.
Obviously, globalization has its downsides, too. Over the years, it has resulted in wider trade deficits, the offshoring of U.S. manufacturing jobs, and the depression of wages for blue collar workers. The U.S. has become reliant on low-cost manufacturing from overseas.
We have effectively been importing disinflation from China. It’s one of the big reasons why consumer price inflation rates have stayed relatively low in spite of the Federal Reserve expanding the currency supply by trillions of dollars over the past decade.
That may now change. A trade war between the U.S. and China would mean higher prices for consumer goods. Other potential pressures for higher inflation include a weaker U.S. dollar and diminishing inventories of key commodities.
Commodity markets fared relatively well this week against the backdrop of a sharply lower stock market. Crude oil prices gained, as did gold.
The yellow metal is up 2.5% this week to bring spot prices to $1,348 an ounce. Silver prices come in at $16.63 after rising 1.6 % since last Friday’s close. Platinum is unchanged on the week at $954, while palladium is off 1.4% to trade at $984 as of this Friday morning recording.
Precious metals markets showed strength in the face of another interest rate hike by the Federal Reserve. On Wednesday the Fed raised its benchmark rate by a quarter point as expected. Fed chair Jerome Powell vowed to continue the rate hiking campaign. But he also indicated the Fed would pursue a “middle ground” that allows inflation to hit the central bank’s 2% target.
Jerome Powell: I think we're trying to take the middle ground there. So, on the one hand the risk would be that we wait too long and then we have to raise rates quickly, and that foreshortens the expansion. We don't want to do that. On the other side, if we raise rates too quickly, inflation then really doesn't get sustainably up to 2%, and that will hurt us going forward, we need that and we need to make sure that inflation expectations are anchored at 2%.
So we're trying to take that middle ground, and the committee continues to believe that the middle ground consists of further gradual increases in the Federal funds rate, as long as the economy is broadly on this path.
Central bankers talk as if they are smart enough to carefully steer the economy toward some kind of happy medium. They expect to be successful in using psychological tactics to “anchor” our expectations of inflation and therefore keep it contained.
They project so much confidence, but in reality they’re just guessing. They’re following the lead of the same economic indicators every other analyst follows and guessing that conditions in the future won’t deviate much from the path they’ve been on lately. When major deviations or black swan events do occur, such as the 2008 financial crisis, Federal Reserve officials are caught just as surprised as every other analyst who fails to see the end of unsustainable trends.
Of course, nobody knows in advance exactly when the next major financial crisis will begin or how it will play out. But unsustainable federal budget deficits are now looming over the Fed and the U.S. economy like a sword of Damocles.
This week our anointed leaders in Congress are hastily attempting to push through a 2,200-page budget ahead of a deadline for avoiding another government shutdown. Nobody in Congress has had time to read through the details let alone debate them.
That’s how Washington operates – run up another trillion dollars in debt like it’s a nothing burger. But pretty soon all these unpayable trillions start adding up to something like one whopper of a currency crisis.
Well now, without further delay, let’s get to this week’s featured interview of Money Metals president Stefan Gleason as we listen to the conclusion of his remarks during the 360 Gold Summit – a discussion about all things precious metals. And we start off where Stefan answers the important question about how to select a precious metals dealer.
Stefan Gleason: You want be careful about who you are doing business with, you want to do a little research. Probably start small with that dealer and see how it goes. See how the service is. See how the delivery is. Another place to acquire precious metals would be from a local dealer. Money Metals Exchange is a national dealer. There is other several other good national dealers.
Local dealers are a little bit more sort of unknown. Some are very good. Some are not. One of the problems though buying locally is that you are often faced with sales taxes. Many states, I think it is about 20 states, actually force dealers who sell inside of their states to collect sales taxes, which are significant. Especially, when you consider that an ounce of gold might cost 5, 6, 7% over spot. Well if you add a 7% sale sales tax to that, that’s a huge, huge markup in the context of the numbers you normally see in precious metals. So that is a disadvantage that many local dealers have when compared to a national dealer. But the advantage perhaps, especially if you are very nervous about dealing with somebody from a long distance, is that presumably you can walk out that day with your metals after having paid, instead of having to wait a couple days in the mail for it to arrive. On the other hand, they may not be as well-equipped locally to detect fakes, which are not a big problem, but they are out there. And there may less of an education component involved, but look at your options. Obviously, our customers are buying from us. Many of them bought locally and then changed to us.
Pete Fetig: That is a really interesting observation with the sales tax. When you think about it, you are actually exchanging one form of currency for real money. You are not buying anything. You are not selling. You are exchanging.
Stefan Gleason: Right. That is an extremely concerning subject. As you pointed out, you are changing one form of money, paper U.S. dollars or coins for another form of money that is recognized by our Constitution as money. Article 1 section 10 of the Constitution sets up gold and silver as the only money that is supposed to be accepted in the States. We have also obviously got away from that. The idea that you would have to pay sales taxes as though it some sort of good as opposed to money. Could imagine if you went to the bank and had to pay sales tax to break a $10 bill into a roll of quarters? I mean that is basically the equivalent. Gold and silver is disfavored by the sales tax laws in many states. And then at the federal level, you have to pay capital gains taxes when your gold and silver goes up in dollar terms, but it may not have really gone up in the context of purchasing power. What happened was the dollar went down. So it’s kind of an example of the inflation tax. You are being taxed essentially through the capital gains tax on the inflation that the government is creating.
And so these are the public policies that we are working to spotlight and hopefully change over time. That is to repeal the sales tax laws that are discriminatory against people for exchanging one form of money for a better, more trusted form of money. And then of course, the discriminatory capital gains tax and, unfortunately, it is even at a higher rate than say a stock. A long-term capital gain on gold bullion is taxed at 28% and not 15% like you would with a gain in a stock. So there are definitely some problems. We can get into this in a minute. That is one of the advantages of holding precious metals in your IRA, is that you can buy and sell without having to pay those gains every time.
Pete Fetig: Is there anything more important than choosing the right product and getting it for a low price?
Stefan Gleason: The most important thing is getting delivery. And that means getting your metal. I would say that in some cases the lowest price can be a red flag. If somebody is selling gold and silver for below its actual value, there is probably something wrong. We recently ran across somebody who had bought some gold from a Bitcoin exchange and he bought it at a discount, a discount to its market price. Well, that is kind of a red flag. Gold and silver is not at a discount to the spot price, particularly on the buy side. So the lowest price is not necessarily the best, safest place to go. Obviously, there is some very good low-cost dealers, including Money Metals Exchange, but there’s also been horror stories of low-cost dealers. I will mention one that went out of business, Tulving Company. They were super low, no service, almost kind of mean to their customers, if you dealt with them. Eventually, at one point about 2 years ago, 100s of people stopped getting delivery. Something like $20 million worth of gold and silver was never delivered. So getting a low price is no good at all, if you are not actually getting your metal. The most important thing is working with somebody and getting what you paid for.
Pete Fetig: Very true. How does the average person trust a dealer or an organization that supplies the coin or bullion?
Stefan Gleason: Well, the first thing is doing a little research. You should always do that with any purchase. You should know who you’re dealing with. When it comes to precious metal dealers, the first thing I think look them up on the BBB. See if there are complaints. See how they have handled those complaints. Everybody probably can have a complaint, but how they dealt with those, how many they have, what kind of rating they have, that is one way of doing the research.
There is another site called Bullion Directory, which has reviewed 100s of companies across the globe. We were honored to have been named precious metals dealer of the year in the United States last year by that ratings group, international ratings group. Those are two things you can do research, the BBB and Bullion.Directory.
The other thing is size them up. Look at their website. Look at the content that they have. If they have an email list, get on your email list. And start small. If you are worried about it, you’re not 100% sure, buy a small amount and see how it goes. See how good the communication is. See if they provide you with transparent pricing and fast delivery. Do they confirm that they got your payment? Was their invoice exactly what you expected? Was it packaged well? Was there pride put into the way they handled everything with their customer? If you have a good experience, that is a really good sign. Obviously, it is not a guarantee, but you really need to pay attention to the people you are doing business with. And that’s just as much, if not more the case, when it comes to precious metals.
Pete Fetig: What sort of considerations are important to make before and after acquiring?
Stefan Gleason: I would say that there are a couple things that I would emphasize. One is what are you going to do with it when you get it? Where are you going to put it? How are you going to store it? Most of our customers probably keep it somewhere in their house. A few will put it in their bank safe deposit box. Some will stored in a depository or at a Brink's facility. Some will put it in their home safe, but some will hide it in other unpredictable places. So if you have a lot of precious metals, you probably want to have some of it stored remotely because that is a lot to have in your house. I do think that everybody should have the ability to get their hands on their gold and silver, at least some of it, very quickly if they need to. So storage is one consideration. Some people are reluctant – and I can understand why – to store it in their bank safe deposit box. In fact, the banks are part of this war on cash and even war on precious metals. Some banks are saying you cannot hold gold and silver or cash in your bank safe deposit box. You may be banking with one of those banks.
But there are also concerns from back in the 1930s. FDR issued an executive order banning private gold ownership in America. Some people felt like the gold that they had in the safe deposit box was being disclosed and potentially seized. That never actually happened, but most people turned it involuntarily, or many people did. But there’s less privacy perhaps, if you hold it in the bank. I think people, rightly, are little reluctant to do that.
The other thing is, in addition to figure how you are going to store it and where you are going to put it, is really to think about the responsibility that you have as a precious metals owner or as a person, to keep your financial business to yourself. A trusted person or a spouse, certainly should be aware, if something happens to you, but you should not be talking about how you bought all this gold and silver. Bringing out your collection and showing it to everybody that comes and visits. There’s been, unfortunately, some really horrific situations where people have not kept her mouth shut. Had been talking way too much about what they own and found themselves with a home invasion or a robbery. So that’s the other thing. Figure out how you are going to store it and also discipline yourself to keep your financial business as private as possible.
Pete Fetig: Very good points. How can the average person best understand appreciation of his holdings or the upside value?
Stefan Gleason: The first reason to own gold and silver is not necessarily for these spectacular gains. Although, I think you are going to see those, at least in dollar terms. The first reason is to own it as insurance and as a hedge. But, particularly with silver, probably also with gold, there is a huge potential upside, even real terms. Right now, we are seeing negative interest rates emerge in Europe. We are seeing 0% interest rates here in the U.S. One of the big knocks on gold and silver is, "It does not pay any interest." Well, neither does the dollar now and then on top of that you have the devaluation of the principal when you own dollars. So gold and silver are becoming very attractive assets. That is particularly been evidenced in the last few months. Gold and silver have done extremely well. So there’s definitely some real potential upside to gold and silver.
In terms of when to get out, I think that you probably want to be owning gold and silver forever, a certain amount. But if you’re more of a speculator and you have larger amounts, than you probably do want to be looking for opportunities to sell over time. But I would say right now is a buying opportunity. Down the road, you could see silver at $100 an ounce or even higher. Gold could be several thousand dollars an ounce before this is all over, particularly if the devaluation continues and maybe you’ll want to lighten your holdings. Right now, I think you are wise to be in the accumulation mode. Unless, you need the money because you need to liquidate for other reasons.
Pete Fetig: That makes sense. I guess related would be, when might an average person consider liquidating his holdings? Are there any solid event types that might precipitate liquidating all of what you have versus only some of what you have?
Stefan Gleason: If you see the U.S. government live within its means and the debt goes from $18 trillion down to 0, that might be a good time to seriously lighten up on precious metals. I personally don’t see that happening. I do not think most people do. I think we are locked on a path here. So I think there is always going to be a significant role for precious metals in your portfolio regardless. But perhaps, if you saw an outbreak of sanity in Washington DC and around the world, and peace emerging, and all these geopolitical things simmering down, and terrorism going away, I think it might be time to seriously consider selling a fair amount of your gold and silver, but we’re not in that situation.
The way to approach this is to not try to pick a bottom or a top. It would be accumulate over time in smaller amounts. Don’t go all in and don’t sell all at once. I would look at this as a way of getting on a plan and slowly and steadily increasing the number of ounces you own. And then, if we get down the road, and you do see things changing, and 40% of the American people are talking about ... You’re getting your shoes shined and the guy is talking about owning gold and silver, maybe that is the time to start selling. But we are nowhere near that situation and most people are dangerously exposed in not owning any. So I would get on a monthly plan and accumulate. Now is the time to accumulate. Down the road would be a time to potentially disgorge some your holdings or if you have a need for it… if you’re in retirement or you have some big expenses. Obviously, you do not want to lock up all of your available cash in precious metals. Just do what you can over time to accumulate and I think you will be rewarded for it.
Pete Fetig: And somewhat related in terms of best place to get it. What about best places to liquidate it? Is there a type of list that would-be investors might consider comparing against or going to?
Stefan Gleason: Well, usually, and certainly it’s the case with Money Metals Exchange, you can sell to the same people that you buy from. We’ll buy anybody's gold or silver coins, bars and rounds. We obviously check it and ensure that it is what it is. We make sure we have it in our facility before we pay the customer, once we verify it. But we buy back and we would love to buy back. Unfortunately for us, most of our customers are just buying from us and very few are selling to us. So we actually have to buy from mints and wholesalers and the U.S. Mint and so forth. We’d love to buy more of our inventory from our customers because obviously we are buying from a middleman. We do make a market. Probably only about 5 to 10% of our inventory is sourced from our customers. We are eager to buy and we offer probably the highest, or among the highest, buyback prices of any of our competitors. We are as eager to buy from our customers as we are to sell to our customers. And that’s probably the case with most dealers. We are not retailers. We are dealers and that means that we both and sell.
You probably would go back to where you bought it, but you do not have to. We buy stuff from people that they bought elsewhere all the time and are happy to do so. The items that we deal in are very standard. Recognizable. Liquid. Some people may want to sell to their local dealer and that’s fine too. They want to walk out with the cash. They may not get as good a price, but it depends on what your priorities are. There is no problem selling your precious metals. But that’s a very good question because a lot of times people say, "How do I sell? What do I do with it?" It is really about as easy to sell it as it is to buy it. You contact a dealer or walk into a dealer shop. They offer you a price. You give them the metal and they pay you. It’s that simple. It is about the same process in reverse as when you buy from us.
Pete Fetig: I’m going to switch gears just a little bit here. How about other precious metals, like platinum, palladium, etc.? Are there times when an investor should be considering acquiring those precious metals or vice versa? Or liquidating, if they are already held?
Stefan Gleason: Platinum and palladiums are the other two major precious metals. There’s rhodium, for example, which is even less considered an investment asset. Platinum and palladium are still a very small part of the precious metals market. There’s less of it, I should mention, but it is not as big of an investment asset. It is more of an industrial asset. Platinum and palladium are used for catalytic converters, diesel and gasoline catalytic converters. With automotive demand, for example, platinum and palladium can go up and down based on what is happening in the automotive market. It is also a financial asset. There are ETFs now. Of course, there are physical bars and rounds and coins, of all of these, including platinum and palladium. But I would definitely not get into those until you have already got a significant or at least a reasonable holding of gold and silver. Those are the two that you want to start with. Platinum and palladium is a little bit more for down the road.
In terms of the upside, again, a lot of it is driven by industrial demand, but they are also undervalued versus gold. As I discussed earlier, silver is way undervalued versus gold historically, both in recent history as well as the longer-term history. But platinum and palladium are undervalued. Platinum is way below the price of 1 ounce of gold and it’s typically 1.5 to 2 times the price of gold over time. Platinum is way undervalued versus gold. But again, that is really not something to jump into until after you already have a meaningful holding of gold and silver.
Pete Fetig: It also sounds like something that you probably would not do until you better understood the market and price swings and so forth of the precious metals in general. What about owning precious metals in your IRA. How does that work? Should you own the only physical metal? Or shares of metal backed by ETF?
Stefan Gleason: ETFs again, if you want to trade and you want to do in your stock account, it is convenient, but there these precious metals backed ETFs. They’re really a proxy. You don’t own direct title to the metal. You own shares of a trust that supposedly owns the metal and then there is a whole series of custodians and sub custodians and sub sub custodians involved in that kind of instrument. So if you’re buying gold and silver as insurance, then why introduce counterparty risk into something that is supposed to be your safe asset? There are reasons people want to buy that. Certainly, it is convenient, but it’s not necessarily cheaper than owning it and storing it and paying the storage fees yourself. There’s still fees involved in the ETFs. I don’t think that’s really something people should be doing. They should be buying physical gold and silver that they have direct title to.
Pete Fetig: What sort of things or education can the average person do for themselves to be better prepared to consider precious metals investing?
Stefan Gleason: This is something our company, Money Metals Exchanges, is really big on and that is education and content. We want our customers to be well-informed and we want to keep them updated. There are lots of websites out there, but a great place is to go to MoneyMetals.com and get on our email list. We send out 2 or 3 informative articles about the markets each week. Pay attention. Get a little gold and silver in your hand. Start thinking about it. Start thinking about what it means. Compare it to paper money. It’s interesting, the first time I had gold and silver my hand 20 years ago, it really got the wheels turning. What is this fiat money? What is this Federal Reserve note? Why does it have value? Why do people accept it? And compare that to this beautiful, timeless metal of gold and silver and it really gets the wheels turning. And that opened up an education process for me. And I think it does a lot of people. And we think the best customers are the best informed. And that’s certainly what we strive for.
I want to get back to precious metals IRAs. That’s one thing that is an area where people might be best able to put money into precious metals because they have IRA accounts. There something called a self-directed IRA . You can set up an account with a self-directed IRA company and then work with a dealer like us and with a depository, you can directly hold title, your IRA can directly hold title to physical metal inside of your IRAs. That’s another way of getting into this market that we definitely encourage people to look at.
Pete Fetig: A lot safer than to be speculating in the stock market. That is for sure. Is there any method to the madness in how the average person might approach what he considers owner or holding? When I say that, for example, is there any sort of 80/20 type of rule or rules of ratio for gold to silver holdings.
Stefan Gleason: I would say that the more likely you are to need to access the gold and silver and turn it into cash or liquidate out of it… the more likely that that’s the case, probably the higher percentage that you want to have in gold. Gold tends to be a little more consistent. It’s rising, but it’s less of a roller coaster. Silver can be quite volatile when priced in dollars. And of course, some of that is just the volatility of the dollar itself. But I would say if you’re looking at a 3 to 5 year horizon, then definitely favor silver. If you’re only going to own gold and silver for a year or 2 and think you might need to liquidate out of it, then perhaps you should favor gold and have a majority of your funds in gold. But this isn’t something that you should be buying and selling like stock. This is something you should be accumulating and not necessarily looking to liquidate it any time soon. It’s there if you need it. Do not necessarily plan on buying gold and silver, if you think you are going to need the money in 6 months. There are some transaction costs involved. Not significant, if you go to the right places, but that is a something to keep in mind.
Going back to you what I said earlier. Silver is definitely the more potentially explosive upside metal. As long as you not looking very short-term, I would definitely have a majority of your funds in silver, but make sure you get some gold.
Pete Fetig: Very good. Well we’re running up against a time constraint here. I wanted to thank you for joining us and offering all of your just excellent insights and observations and answers to all the questions that we have thrown at you today. Before we leave though, I would like to offer you the opportunity to let people know how to reach you and to contact you at Money Metal Exchange.
Stefan Gleason: Thank you so much for the opportunity. And hopefully, I’ve shown education is a big part of what we do at Money Metals. I think when compared to other dealers that’s one of our very strongest differentiating factors. Go to MoneyMetals.com. Look at the products. Most importantly, get on our email list and let us continue to educate you about the market. We also have a monthly savings plan, which you can get into, where you set up a certain amount each month where we debit your bank account or whatever your instructions are, and send you on a steady schedule gold and silver. And that’s a great way to accumulate, kind of put it on auto pilot. So that’s available at MoneyMetals.com as well. But I certainly really appreciated the opportunity to talk about this important subject and also about a company.
Pete Fetig: Well thank you for joining us today. And folks, thanks for listening in and we hope you guys have a great day.
Mike Gleason: You’ve just heard the conclusion of Stefan’s interview with Pete Fetig during the recent 360 Gold Summit, we hope you enjoyed it. If you happened to miss the first half of the interview be sure to check it out, either on the MoneyMetals.com website, or by downloading it on iTunes.
Well that will do it for this week, please check back 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.