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Stocks and Gold Rally on Fed Dovishness, Global Conflict
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 Marc Faber, Dr. Doom, joins me for a must-hear discussion 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. So don’t miss a tremendous interview with Marc Faber, coming up after this week’s market update.
Well, what a week – big developments to report in politics, geopolitics, monetary policy, stocks, crude oil, and precious metals.
Let’s start with the gold market. On Thursday, gold prices surged $30, breaking through some major resistance levels and closing at a five-year high. The money metal ended up at $1,390 an ounce, just shy of the psychologically significant $1,400 level. It did cross over that during the Asian trading session last night and as of this Friday recording is back below it now to trade at $1,396 per ounce and is registering an impressive 4.0% gain this week.
Silver shows a weekly gain of 2.6% to bring spot prices to $15.32 an ounce. Silver has been following the lead of gold and has yet to show any real leadership of its own so far during this precious metals rally. Silver prices remain historically depressed versus gold, but that could change quickly.
Gold and silver mining equities have shown powerful relative strength over the past month, suggesting investors are anticipating follow through from the prices of the underlying metals. If you missed gold’s move to new multi-year highs, you’re not too late to catch a possible breakout move in silver – which has yet to even make a new 2019 high, let alone take out highs from previous years.
A catalyst for further gains in metals could be rate cuts from the Federal Reserve. On Wednesday, the Fed announced it would leave rates unchanged for now. That came as a disappointment to doves, but policymakers added language suggesting they are moving closer to acting.
Investors took the central bank’s statement to mean a rate cut in July is on the table, and probably another one after that. The S&P 500 responded by notching a new record high on Thursday.
The stock market stole gold’s limelight, and another leg higher for the aging bull market in stocks would likely diminish the safe haven appeal of precious metals. However, there is no rule that says stocks and metals can’t rise in tandem – especially if they share a common driver in monetary inflation.
Right now, stocks, bonds, and gold are all on bullish footing. Crude oil and other commodities are also threatening to trend higher, which would bring inflationary side effects to the economy.
Another apparent attack this week by Iran– this time on a U.S. drone – helped boost oil prices on fears of a larger conflict. A war with Iran and a blockade of oil tankers in the Persian Gulf could easily send oil prices spiking up into the triple digits.
In such a scenario, investors who hold economically sensitive stocks and low-yielding bonds would be in a vulnerable position.
Some of President Donald Trump’s top advisors clearly want war with Iran, but the President himself seems more interested in domestic issues like immigration and the economy. He formally launched his re-election campaign this week in the crucial battleground state of Florida.
Some national polls show Trump losing to Democrat frontrunner Joe Biden. But we would suggest these early polls don’t mean much.
To begin with, Biden will have a tough time securing his party’s nomination. He’s running on a center-left track record obtained during a different era in Democrat politics. He’s running against several hard left candidates who, combined, are more popular with today’s Democrat voters than he is.
The base of the party now essentially embraces socialism. Radical leftists who vote in primaries will insist that candidates commit to a long list of pie in the sky promises such as socialized medicine, slavery reparations, a Green New Deal, free college tuition, free abortions, and free everything for illegal aliens.
If the former Vice President wins the DNC nomination by going hard left on all these issues, he could make Trump look like the sensible moderate in the general election.
The Vice Presidency is often seen as a stepping stone to the Presidency. But that hasn’t been the case in recent years.
Joe Biden passed on the opportunity in 2016, claiming personal reasons. We can only imagine the pressure that was put on him privately by Hillary Clinton and her backers at the DNC to stay out of the race.
The previous Vice President, Dick Cheney, also declined to run.
Former Vice President Al Gore captured his party’s nomination but failed to win the general election in 2000. That same year Dan Quayle, Vice President to George H.W. Bush, ran unsuccessfully for the GOP nomination that was claimed by Bush junior.
Back in 1984, Jimmy Carter’s Vice President Walter Mondale got crushed in a landslide by Ronald Reagan.
When Richard Nixon resigned from office in 1974, VP Gerald Ford assumed the presidency but failed in 1976 to get elected to the nation’s highest office.
Since 1974, only one former Vice President has gone on to win a Presidential election. That was George H.W. Bush in 1988. Voters threw him out after just one term.
Fast forward to 2019. After running unsuccessfully for President more than three decades ago, then playing second fiddle to Barack Obama for eight years, then deferring to Hillary Clinton, it would be awkward for Joe Biden to try to explain why his time is now.
President Trump’s re-election prospects are probably better than the polls now suggest. If the GOP does keep the White House in 2020, would that be good news for stock market bulls and bad news for gold bugs? Not necessarily.
The last time a Republican was up for re-election was 2004. Incumbent President George W. Bush faced off against Democrat challenger John Kerry.
Gold and silver markets performed well in the second half of 2003 and made modest gains in 2004. The metals were in the early stages of a major bull market.
When George W. Bush won re-election in November 2004, gold was trading at a mere $450. Gold went on to hit a record $1,000 per ounce in early 2008. Over that same period, silver advanced from under $8 to over $20 an ounce. Precious metals vastly outperformed the stock market through the four years of W’s second term.
In the years ahead, forces now in motion should continue to exert upside pressure on gold and silver regardless of election outcomes. Steadily rising government debt and inflationary monetary policy are inevitable thanks to the political priorities of both Republicans and Democrats.
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 weekend, everybody.