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Government & Central Bank Secrecy Exacerbate Systemic Risks
Marc Faber: Currencies to Collapse against Precious Metals, Investors Must Diversify
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Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.
Coming up the one and only Marc Faber joins me for a tremendous conversation on debt, the global economy and the future of the dollar. Marc tells us how much he believes the average investor should have in gold and silver right now and reveals which precious metal he favors most going forward. Don’t miss a must-hear interview with Marc Faber, Dr. Doom, coming up after this week’s market update.
Well, the gold market finally broke away from the $1,300 level, where it had been ranging for several weeks. Unfortunately for the bulls, it broke to the downside.
Gold hit a slight new low for the year on Thursday. With the markets closed today for Good Friday the gold spot price will end the week at $1,276 per ounce, registering a 1.2% weekly decline.
Although gold is showing some technical weakness, it is not seeing a massive liquidation in the futures markets.
However, the embattled government of Venezuela did dump another 9 tons of its dwindling gold reserves onto the market. Apparently, Venezuelan officials found a viable way to skirt economic sanctions on their gold after billions of dollars worth of the yellow metal was frozen by the global banking system at the behest of the United States government.
In executing the latest sale of gold, the Venezuelans likely received some assistance from the Russian government, which continues to add to its gold reserves at a breakneck pace. Steady central bank demand for hard money in Russia, China, and elsewhere in the Far East could put a floor underneath the gold price not far from current levels.
Turning to the white metals, they are all outperforming this week. The silver market will close the week essentially unchanged at $15.07 an ounce. Platinum is up 1.3% to trade at $907. And finally, palladium rallied 3.2% this week and now trades at $1,432.
Well, it’s not just foreign regimes that are being targeted for punishment by the U.S., but also investigative journalists. Wikileaks founder Julian Assange now awaits likely extradition to the United States for his alleged role in hacking into secret U.S. government files.
Over the years, Assange made many enemies in the deep state – first by exposing apparent war crimes in Iraq and Afghanistan. For a while, Wikileaks was viewed favorably by many on the left. But when it published damning emails ahead of the 2016 election that implicated Hillary Clinton and the Democratic National Committee in scandals, liberals suddenly became livid.
Many Republicans learned to love Wikileaks. Donald Trump himself praised Wikileaks repeatedly on the campaign trail as the damaging leaks helped sink Clinton’s poll numbers.
Now, though, President Trump is disclaiming any support for Wikileaks or Julian Assange as his administration prepares to prosecute him. The mainstream media are normally hyper-critical of any action the administration takes. But Assange has made plenty of enemies in the press, and few journalists will be willing to take the reputational risk of coming to his defense.
Many journalists are understandably embarrassed that Wikileaks came to the scene as a more credible source than establishment outlets with much larger budgets but less guts or integrity. In the Trump era, virtually all the major media companies have repeatedly pushed fake news – whether for partisan political reasons or out of desperation for ratings.
What Wikileaks reports is very real… and often very damaging to powerful people whose secrets get exposed. An argument can certainly be made that journalists have a responsibility to withhold information that poses serious national security risks. Perhaps in some cases, Assange went too far in his pursuit of radical transparency.
But a strong case can also be made that our political and financial systems should be subjected to more rather than less sunlight.
For example, there is no valid national security reason why the people in charge of our monetary system need to operate in secrecy. When the Federal Reserve moved secretly following the 2008 credit crisis to bail out financial institutions, including some foreign entities, the American people were left in the dark. They had no opportunity to weigh in on whether there were better uses for the trillions of dollars conjured up by the Fed.
Federal Reserve officials continue to actively resist a full audit of the central bank’s books, despite broad public support for greater transparency.
A full audit of the government’s gold reserves at Fort Knox and West Point hasn’t been conducted in decades. Maybe the government has nothing to hide. Maybe the people who raise doubts about whether the gold is all there, whether it’s all real, or whether it’s been leased out are just a bunch of kooks. But there is nothing kooky about demanding government bureaucrats verify the gold assets on their books rather than just take their word for it.
That’s why we’re pleased to be able to break some news on the podcast today… Congressman Alex Mooney will be introducing new federal legislation in the coming days which would require the first true audit of America’s gold reserves in over 65 years.
Contrary to the public comments of central bankers in the West, gold is an extremely vital asset. The whole point of gold reserves – whether held by a government or by an individual – is that their value doesn’t depend on anyone else’s word. But when gold assets get tangled up in the banking system or are entrusted to a secretive central bank or a corrupt deep state, trust and counterparty risk issues enter the equation.
The lesson for precious metals investors is to insist on transparency. Only buy from dealers who are transparent about pricing, shipping, insurance, and customer service. And if you choose to store your bullion with a third party, make sure it is transparent about its security measures and its audits. Make sure it is transparent about whether your coins and bars will ever be co-mingled with the assets of other clients or of the company.
To avoid this type of risk, insist on fully segregated storage at a vault set up for this purpose. One such vaulting option is through Money Metals Depository. It is located in a depository building custom-built to Money Metals specifications, including thick steel and hardened concrete. Money Metals Depository uses only top-of-the-line UL Class 3 vaults protected by 24-hour monitoring and the latest security protocols. All contents are fully insured by Lloyd's of London and audited both internally and externally on an ongoing basis.
If you need storage for any portion of your metals stockpile, just call us at 1-800-800-1865 or visit MoneyMetals.com/depository to get started. And despite the market holiday Money Metals offices are open today.
Well now, without further delay, let’s get right to this week’s exclusive interview.
Mike Gleason: It is my privilege now to be joined by a man who needs little introduction, Marc Faber, editor and publisher of the Gloom, Boom and Doom Report. Dr. Faber has been a long-time guest on financial shows throughout the world and is a well-known Austrian school economist and investment advisor, and it's a tremendous honor to have him back on with us today.
Dr. Faber, thank you so much for joining us again, and how are you?
Dr. Marc Faber: Fine, and that it's a pleasure for me to participate in this interview.
Mike Gleason: Well Marc, we'll start out today with everyone's favorite topic, that being Fed policy and what's happening there because it continues to be such a key driver for everything, much to our dismay. The markets have been so addicted to Fed stimulus and cheat money since the Great Recession a decade ago, so is it possible that they can withdraw this stimulus? Or did we just learn over the last few months… going back to, say, November and December when we saw the equity market suffer dramatically over the idea of the Fed moving forward with those three to four planned rate hikes for 2019, after which the Fed has reversed course and completely backed off on any rate hikes this year… are we just looking at never-ending stimulus from the central banks now, Marc? What are you thinking as you've watched the events unfold over the last few months with respect to monetary policy and this apparent sea change?
Dr. Marc Faber: Well, it's a complex issue. It's particularly complex at the present time because the global central banks, I mean the major central banks, they can argue, well, there is little inflation in the system, and so we can continue to print money or to purchase assets, which, either way, is true. There is little consumer price inflation, partly because the economy of ordinary people is not particularly good. We have a split economy. The economy of the well-to-do or extremely well-to-do people is doing well, and the economy of the ordinary people in Europe, in Japan, in the U.S., is not doing well. And so there is little inflationary pressure, but there is a lot of inflation, or has been a lot of inflation in asset prices. Stocks are at highs in the U.S. essentially, not the oil industries but several industries. And we have now 10 trillion-dollar worth's of bonds in the world that have negative interest rates, it’s in some kind of a bubble, or a big bubble.
And so we have this asset inflation, and in my view, the central banks and the policy makers, they realize that if the asset bubble really breaks, if the stock market drops 20%, if home prices drop 20%, if bond prices go down 20% or so, the whole world is in a depression. So, I think that when they started actually in 2008, with QE1 in December 2008, and I was asked at the time, "How do you think it will end?" I said, "They just started QE unlimited. I think they will continue to print money until the system breaks.” And that can take another few years.
But I think, yeah, it's likely, if you were to look at the political landscape, you have on the one end the Republicans, at the present time under the leadership of Mr. Trump. He wants to spend on defense and on his wall and on all kinds of things. And the Democrats, they also want to spend on all kinds of things. So, you can be sure that the deficit in the U.S. will remain around a trillion dollars a year for the foreseeable future. And in my view it's more likely that this deficit will go up, and possibly quite substantially. So, the money printing, in my view, will continue.
Now could you have QE, and at the same time the Fed raising interest rates? That is a possibility. But in the current environment, where the economy has been slowing down, I think they will rather do nothing, especially also under the pressure from the White House, which essentially accuses, or tells the world that if the Fed hadn't raised interest rates, the stock market would be much higher. So, I think they will not increase rates further. I think they will not cut the rates, as Trump and Kudlow would suggest, to simply show them that they're independent, and that they don't need Mr. Trump and Mr. Kudlow to tell them what to do.
Mike Gleason: Despite what the Fed has been doing, we are still seeing a strong dollar because the Fed has been a bit more hawkish than the ECB and the BOJ – the Bank of Japan – and other major central banks throughout the world. Do you see this reversing at some point? We know Trump doesn't want a strong dollar, so how do you see things playing out in the currency markets? Because for the most part, gold, if we relate it to gold, is going to trade off the U.S. dollar in many respects. As long we see strength in the dollar, it's likely going to be difficult for gold to really catch fire. Give us your comments on the dollar and what you see ahead for the greenback.
Dr. Marc Faber: Well, I think the dollar is strong because many investors argue that the economy in the U.S. is either better conditioned than European economies. Who knows? But one reason the dollar has been strong is you have all these negative interest rates in Europe. In Germany the 10-year yield is now negative, and in Japan as well, in Switzerland as well. And in Spain you have interest rates on the 10-year government bonds of 1%, whereas in the U.S. it's 2.58%. So, I could argue it's logical that if you get more than twice as much interest in U.S. Treasuries than in Spanish bonds, and you're an insurance company in Europe, or sovereign fund in the world, you rather buy U.S. Treasuries than Spanish bonds. I think it's quite logical. So, I think that has supported the dollar.
But I personally, I think the dollar should in due course weaken, and as the dollar weakens it could also trigger weakness in the stock market.
Mike Gleason: As usual, when you're a guest on our podcast, we like to get your take on what's happening globally. In particular, we are interested in what you expect from Asia. There seems to always be talk in the U.S. media about China slowing down. Perhaps the tariffs are having an impact. However, the U.S. trade deficit doesn't appear to be budging very much. What are you expecting with regards to the possibility of recession in China? And where do you see the global economy headed in the near term?
Dr. Marc Faber: Well as you know, the Chinese had all this excessive credit growth. Now you could argue, well, they have this excessive credit growth because they have also a very high propensity, or rate of capital spending to build apartment buildings and bridges and roads, and the whole infrastructure. This is very costly. And so the borrowings are very high. But whether China will go into recession or not is a question also, can in China some sectors be in a recession, like car sales are down this year, and other sectors continue to expand? It's a huge country. It's actually almost a continent with 1.3 billion people. So, different sectors will perform differently. But since I live in Asia, my observation is that there has been a slowdown in economic activity. We're not in a recession, but we're in a very low-growth phase. There's very little growth at the present time, and if there is growth it is because of borrowings… but that is also the case in the U.S. Without a trillion-dollar deficit and the debt build-up, student loans and car loans and everything, and credit card loans, the U.S. economy wouldn't be growing either.
Mike Gleason: We saw back in, I believe it was late summer 2015 when the Chinese economy really hit the skids there temporarily, and it almost started a massive global panic there in the equities markets. Is China still a key linchpin when it comes to how they're doing, so goes the world to some respect? And do you see maybe some doom coming down the road for China that could find itself manifesting in other economies and other markets?
Dr. Marc Faber: Well, China consumes approximately 50% of all industrial commodities in the world. So if there is a recession in the manufacturing sector in China, yeah, of course the world feels it. Or if there is less demand for smart phones in China, and also, I have to mention here that India has also become a large market. So, if there's less demand for these toys, or for these very sophisticated mobile phones, then obviously the world feels it because it affects Taiwan and South Korea. And in turn it affects American semiconductor companies and so forth and so on. So, it goes through like a bush fire. And if China travels less, if there are less international travelers, then you're talking about 140 million Chinese, and if they drop by 10%, then it's 14 million Chinese that will no longer travel. And that, every market will feel. So they have a huge impact on the global economy undoubtedly.
Mike Gleason: Marc, how about this move towards socialism that we're seeing, whether we're talking about monetary policy or when we look at the landscape of the Democrat presidential candidates who will challenge Trump in next year's election here in the U.S., what do you make of this movement that does seem to be gaining steam in many respects throughout the world? And how might this impact financial markets and investment opportunities in your view?
Dr. Marc Faber: Well, I just wrote an essay about monetary inflation and the social impact of monetary inflation, because depending how the monetary inflation works through the system… in the case of hyperinflation, Germany in 1922, 1923, the middle class was essentially eliminated. They lost basically most of their savings one way or another. But the rich people made a lot of money. And I'm comparing it to the current time, where the middle class hasn't lost money per se, but because the rich people became so rich, the middle class has kind of been pushed down relative to the super rich people. That creates then an unfriendly environment.
The people that vote, they don't understand a lot. But it's very easy for a politician to go to people and say, "You know why you're not doing well? It's because of Jeff Bezos, he's got so much money, and because of Warren Buffet, he's got so much money, and Bill Gates, and so forth. And because of these hedge fund managers, they don't pay any tax or they don't pay much tax," which is actually true. The corporate world in America pays very little tax compared to individuals. If you look at the composition of tax revenues by the government, the bulk is paid by individuals, not by the corporate sector.
And so, through destroying wealth and income inequalities, the mood is in favor of taking money away from the wealthy people and distributing money to the ordinary people. And then they see, the ordinary people, how much is being spent on defense, in the case of the U.S., close to 750 billion dollars a year. And a lot of it is not accounted for. And they say, "Well, this money shouldn't be spent on defense. It should be spent on social programs," and so forth and so on. So the mood, towards socialism, especially we have surveys that showed the millennials, about 60% of the millennials, they are in favor of more government interventions.
Mike Gleason: Yeah, definitely something we'll be keeping an eye on here over the next year or so, especially as we get close to the election season, we'll see what happens there.
Well Marc, as we begin to wrap up here, give us some more of your thoughts on the precious metals. For instance, do you see better value in one of the PMs over the others perhaps? And given everything that we've been talking about here today, with all of the debt in the system and the potential of never-ending stimulus and perpetual money printing, do you envision it being a strong environment for the metals moving forward? And basically, how do you see the sector performing overall, say this year and next? And then what will it take for them to sustain a rally to the upside finally?
Dr. Marc Faber: Well, the one thing I want to say, that everybody who lived through the monetary inflation of Germany – which ended up in kind of a hyperinflation, but I just want to explain – in the case of Germany, the hyperinflation was also made possible because the other countries didn't inflate. And so the mark depreciated against the foreign currencies, which then added to inflationary pressures. In the present state of monetary policy around the world, because everybody prints money, currencies don't collapse against each other, with very few exceptions like the Turkish lira and the Argentine peso and so forth. But basically, the major currencies, they trade against each other.
So where will the collapse of the currencies come from? In my opinion, they'll all collapse against precious metals. And it is conceivable, and this is something we just don't know, it is conceivable that they'll also collapse against some cryptocurrencies. Now, I think there is a chance, we’re not sure – this is a kind of a theory – it is conceivable that Bitcoin becomes the standard, the gold standard of cryptos. But I'm not sure.
All I want to say, investors, in an environment such as we have of money printing, they need to diversify. They need to own some equities. We don't know whether these monetary inflations will end up with a deflationary bust, in which case you may want to own some U.S. Treasuries, or it could lead to high inflation, consumer price inflation, in which case you want to own maybe a farm or some properties overseas. Or you may wish to own some precious metals. I think in any scenario, you should own some precious metals. Or the question is, should you own 3% of your money in precious metals or 90%? That everybody has to decide for himself. I recommend about 20, 25% of your assets in precious metals.
And as to the question, which one is (likely to perform) best? I think platinum is the cheapest at the present time of the precious metals. And I think it has actually a favorable outlook. I think there will be a supply shortage, and that the price could significantly outperform gold and silver.
Mike Gleason: Yeah, we agree. Lots of geopolitical dynamics involved in platinum there, and that's going to be an interesting market to follow.
Dr. Marc Faber: Yes, exactly.
Mike Gleason: Well, Dr. Faber, thanks so much for your time and for staying up late with us there in Thailand. It was certainly real joy to have you back on and get your insights on the state of things. And before we let you go, please tell folks how they can subscribe to the Gloom, Boom and Doom Report so they can get your great commentaries on a regular basis.
Dr. Marc Faber: Thank you. Well there's a website, GloomBoomDoom.com. And there all the information it contained.
Mike Gleason: Again, it was a real privilege to speak with you, Dr. Faber. I hope we can do it again before too much longer. And have a great weekend. Thanks for joining us again.
Dr. Marc Faber: Yes, you too. Bye-bye. Thank you.
Mike Gleason: Well that will do it for this week. Thanks again to Dr. Marc Faber, editor and publisher of the Gloom, Boom and Doom Report. Again, the website is GloomBoomDoom.com. Be sure to check that out.
Mike Gleason: And don't forget to check back here 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 Easter weekend, everybody.