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China & Russia Hoard Gold as Fed Makes More Faulty Forecasts

Jp Cortez: Sound Money Movement Gains Momentum in the States


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Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

Coming up we continue our discussion on the importance of sound money -- and we are going to check in on the progress at both the state and federal levels. Jp Cortez of the Sound Money Defense League joins me to update us about sound money bills across the nation and also shares his group’s sound money scorecard -- revealing which states have policies that favor sound money and which states are simply abysmal. So be sure to stay tuned for my very interesting conversation with Jp Cortez, coming up after this week’s market update.

Precious metals markets enter November’s trading with bulls eying a potential year-end rally. 

Gold and silver prices did manage to post gains on Wednesday and Thursday after the Federal Reserve announced a quarter point rate cut.  But the Fed followed up its move with language suggesting interest rate policy is now on pause.

News Anchor #1: The Federal Reserve cut the benchmark rate by a quarter of a percentage point. It's now at 1.5% to 1.75%. The rate cuts come on a global slowdown, they say. Also muted inflation. Now the Fed does signal in this statement a pause for future rate cuts. The Federal Reserve statement changes the words from “act as appropriate” to “assess.”

News Anchor #2: Fed Chairman Jerome Powell signaled that the rate-cutting exercise is likely over for now.

Jerome Powell: We think that the current stance of policy is likely to remain appropriate, likely to remain appropriate, as long as incoming information about the economy is broadly consistent with our outlook, which is a positive one of moderate economic growth, strong labor market and inflation moving close to 2%.

Fed chairman Jerome Powell may say the current Fed funds rate is “likely to remain appropriate,” but Fed officials aren’t necessarily the most reliable forecasters of their own policy moves. 

This time last year, they certainly weren’t expecting to be delivering rate cuts and bailing out the repo market with hundreds of billions of dollars in liquidity injections. 

In fact, Fed policymakers were giving guidance that 3 to 4 more rate increases were planned.  Instead, they have done the opposite.  They just cut rates for a third time in 2019.

The Fed could end up orchestrating more unplanned interventions in the months ahead.  With so much uncertainty in the economy, in U.S. politics, and in geopolitics, investors should brace for some surprises and potential black swan events that nobody sees coming.

Gold is historically and remains a premier asset to hold during uncertain times.  Prices for the yellow metal currently come in at $1,511 per ounce, up 0.3% this week. 

Turning to the white metals, silver trades at $18.10 an ounce and is unchanged on the week. Platinum is showing a 1.3% weekly advance to trade at $941.  And finally, palladium shows a weekly gain of 1.9% to come in at a record $1,812 per ounce.

Global demand for physical precious metals is on the rise this year from a number of different sources. It’s not making major headlines in the United States, but robust gold buying from the Far East including China and Russia is slowly changing the dynamics for precious metals markets.

Last year, surging monetary demand from Russia and China resulted in the most global central bank buying of gold since the United States closed the gold window on the dollar in 1971.

According to official reports, China has added 106 tons of gold to state reserves so far in 2019, while Russia has acquired 145 tons of new gold.  Trade disputes and the threat of widening economic sanctions appears to be accelerating gold accumulation among U.S. adversaries.

The global gold trade is steadily shifting east for other reasons.  For one, the rising middle class in India and China has an enormous and growing appetite for gold jewelry. 

The Chinese are also becoming more aggressive in buying and developing gold mines and trading the monetary metal on Chinese exchanges.  In just the first six months of this year, gold trading on the Shanghai Futures Exchange doubled to a total value of more than $1.2 trillion. If this rate of growth continues, gold futures may one day be quoted around the world in Chinese yuan.

Despite all this, it’s doubtful that Chinese authorities intend to pursue sound money principles and transition to a gold-based yuan.  They will continue to depreciate their currency just like the United States and other countries are doing.

The longer that international trade disputes go unresolved, the more likely that tit-for-tat currency devaluations will take place.  The U.S. dollar has strengthened versus foreign currencies since 2018.  But it declined in October and has room to decline much further in the months ahead should “weak dollar” fiscal and monetary policies prevail. 

The Fed isn’t fully in line with the Trump administration in that regard. President Donald Trump continues to call for a more aggressive rate-cutting campaign from the central bank. 

But the recent massive and unexpected expansion of the Fed’s balance sheet may be a game changer for the dollar.  Even if the Fed remains on pause when it comes to interest rate moves, it will still effectively be continuing to ease in the months ahead through its repo market operations and Treasury bill purchases.

The prospects of that translating to a weaker dollar and higher inflation rate are pretty good.  And precious metals could be among the prime beneficiaries.

Well now for more on the state of money -- more specifically, the only money mentioned in the U.S. Constitution, gold and silver -- let’s get right to this week’s exclusive interview.

JP Cortez

Mike Gleason: It is my privilege, now, to welcome in Jp Cortez, with the Sound Money Defense League, a non-partisan national public policy organization working to restore sound money on the state and federal level.

Jp is a proponent of, and has studied in the Austrian School of Economics, and his role at SMDL as policy director, has him regularly testifying at legislative hearings and speaking at various events throughout the country.

His articles and analysis have appeared in many national news publications, including The Washington Examiner, Huffington Post, Mises Institute, Foundation for Economic Education, and more, and he's a frequent guest on various podcasts and national radio shows to talk about the importance of sound money legislation. And it's a real pleasure to have him on with us today.

Jp, thanks for the time and welcome.

Jp Cortez: Mike, I appreciate you having me on. Thank you so much.

Mike Gleason: Well, Jp, as we start out today, let's set the stage here and first have you explain why this idea of sound money is important in the first place, and then, as a follow up to that, what kind of policies would help restore and reinforce sound money? Let's begin with that.

Jp Cortez: Sure. In fact, actually, I'd like to take a step back from there. I think it's important to define sound money and kind of understand what it is to really understand the implications that it has.

So sound money, just to begin, a cursory definition is money that isn't really prone to severe appreciation or depreciation in the purses in power of the money over the long term. And this is a function that's aided by the self-correcting processes that a free market has. It's a money that has been subject to competition and to market forces, over a long enough timeline that we see, and we collectively understand that it's a money that holds up.

And so it's important because historically, now that we know what sound money is, historically we can seize it, it's the linchpin of a prosperous society. Throughout history, if you look back, you can go back to the Roman Empire and see the debasing of money is not something new to the United States. Dollar devaluation has a long and storied history.

And so understandably, Roman soldiers were getting upset when their government was issuing less pure coins to fund the empire that they'd created. And so I think sound money and the importance of sound money can really be boiled down into two value propositions.

The first is that, sound money reduces uncertainty. The money that we choose has really, really important impacts on how societies, as a whole function, the ways societies spend, the way they save, the way they invest. The entire process from capital accumulation to capital investment is very dependent, or at least strongly influenced on the money that we use.

So, by moving to a sound money, we find that uncertainty is reduced, and entrepreneurs and consumer and investors can better and more accurately react and really take account of the signals that are being provided by the market.

The second kind of important point of sound money is that it acts as a safeguard against big government. So, on top of, and aside from any sort of economic implications that the money you choose may have, sound money acts as a safeguard against big government. I like to imagine sound money as sort of an equal opportunity money. It's very inclusive in that we all have things about the government we don't like, whether it's massive wars, or domestic spying, or immigration, whatever it may be, there are things that the government does that we don't like.

And without sound money in a monetary system like the one we have today, the government doesn't need consent from its people to do these things that we don't like. They can just print the money. But under sound money, a government has to turn to direct taxation to fund wars, to fund ineffective policies on domestic drug use, or illegal domestic spying, or constitutional, or rather unconstitutional wars.

Mike Gleason: Yeah, and obviously there's taxation a couple of different ways. One is the old fashion way where they raise our taxes, and the other one is that stealth tax, the inflation tax which happens through printing all that money that the Treasury Department's doing to pay for all this, like you mentioned.

Now I know that the Sound Money Defense League has released a Sound Money Index, which scores each state and assess how well they're doing when it comes to the sound money policy. And that index is also available at MoneyMetals.com, as well, by the way.

So, talk about the state of the states, Jp. What was the criteria you used there? And give us a run down on some of the best and worst states for sound money.

Jp Cortez: Mike, if you don't mind, I'd like to go back. You asked a question about what policies would help send sound money or help facilitate sound money in the United States.

Real quick, I think mostly the biggest issue here is the taxes – the taxation around money, sales tax and capital gains tax, and all of these things that serve as a disincentive to using sound money every day. In a lot of ways, in 1971 you could say that the American dollar hit an iceberg, with the closing of the Gold Window, with Nixon's actions, money hit an iceberg. And there are very few lifeboats available to people to get off this sinking ship. And to tax money is to throw shackles on one of the few lifeboats that is available to move away from an asset that we know is moribund, that we know is depreciating, and that, historically, we know eventually will die as all fiat currencies have.

So, back to the Sound Money Index. Yeah, the Sound Money Index is a really cool project that we put together. It's the first of its kind and we ranked all 50 states. At least, in 2018, we ranked all 50 states using nine specific indicators, nine points of criteria to determine which states offer the most pro sound money environments in the country.

So, to that end, last year we had Utah, Wyoming, and Texas. Those were our top three. They had recently passed laws. The Wyoming Sound Money Act eliminated all taxation liability on gold and silver in Wyoming. Arizona had recently passed a capital gains exemption, exempting gold and silver from capital gains. Utah, of course, in 2011 had the original Sound Money Act.

And so, this year it's exciting to see the renaissance, the revolution of sound money continue on the state level. This year in West Virginia, we had two bills that were introduced, and fortunately I'm happy to say that gold and silver are no longer taxed in West Virginia anymore.

In Nebraska and Washington, tax hungry legislators over there tried to introduce bills to impose taxes where exemptions had already been passed. I'm happy to say that, because of grassroots efforts, and because of in-state dealers and other coming in to really voice their concerns, those efforts were squashed.

Unfortunately in Ohio, we suffered a defeat. It's kind of a strange dynamic that's playing out there. Not too long ago, there's still a cloud hanging over Ohio of a swindler, a rare coin "Investor" who swindled Ohio taxpayers out of 50 million dollars in taxpayer money. And so, Ohio had a bad taste in its mouth, it was an environment that was sort of against sound money to begin with, and it was an uphill battle. But we look forward to bringing, hopefully new legislation next year and helping to convince and really show the Ohio legislature that they made a big mistake. And the people most harmed by their mistakes, unfortunately are the poorest… the savers, those on fixed income, retirees, the people who can't afford to hedge the loss of their purchasing power.

Mike Gleason: You mentioned Utah and Wyoming and Texas as your top ones there on the Sound Money Index. How about some of those bottom states?

Jp Cortez: Ah well, at the bottom, the 2019 Sound Money Index hasn't come out yet, but the 2018 Sound Money Index has six states with a zero score. That is Arkansas, Maine, Kentucky, New Jersey, West Virginia, and Vermont.

And so part of the reason I'm so fired up about sound money, and part of the reason that the path looks clearer than it ever has before to restoring sound money, is that just these here, just in these bottom three states, three of these states this past session introduced legislation to remove taxes on sound money. Arkansas, Maine, and West Virginia, all three introduced legislation.

Unfortunately not all of them passed, but West Virginia is making big strides, and state policy is more of an incremental game and it's laying the foundation to continue to build on this in future sessions.

Mike Gleason: Yeah, certainly a lot going on at the legislative level over the last couple of years, which is one of the big reasons why we wanted to have you on to kind of update us on all this.

Now what about federally, Jp? We've all heard Trump make some pro sound money comments, although he did a little more of that as Candidate Trump than he has as President Trump. What's with the situation at the federal level, what kind of legislation or executive action can be pursued there?

Jp Cortez: Yeah, it was really exciting to hear Trump, and Pence, talk so favorably about a gold standard while they were on a campaign trail. Unfortunately that's simmered down a little bit, but with the recent news about Trump's plan to nominate Judy Shelton to the Fed, we're seeing sound money kind of make an uptick again here, at least in mainstream media.

So, it's exciting, and there's a lot going on here aside from the potential nomination. Just generally, the IRS a while ago, unilaterally decided that gold and silver are collectibles, that is to say there's no difference from gold and silver to a Beanie Baby, or a baseball card, or something like that. So, at the top level, one of the easiest things that could happen at the federal level is for the IRS to just decide either, A, we are not going to tax gold and silver at a discriminatorily high 28%. Another option is just to stop taxing at all, this classification is wrong.

That's probably all that could happen without legislation, but fortunately there are a few sound money allies in Congress that have been fighting this fight. Just this year, Alex Mooney, Representative Alex Mooney from West Virginia has introduced two pieces of legislation. One, to very broadly remove taxation on gold and silver coins, rounds, and ingots, foreign and domestic, which would be a very broad and great step forward for sound money. Representative Mooney also introduced an Audit the Gold bill. The bill that calls for a full assay, inventory and audit of all the U.S.'s gold holdings and any encumbrances on that gold that might exist. And then it calls for subsequent audits ever five years too.

So, our last audit was mostly for show, and it was in the 1950s, and we haven't really seen or heard much about America's gold since then. So, it's great to have Representative Mooney on the front lines, calling for an audit on this stuff.

Mike Gleason: Yeah hopefully he can get some more allies there in congress. These are certainly uphill battles, and we would love to see him get some others to join him in those efforts.

Well, as we begin to wrap up here, Jp, any other comments or anything else you want to share with our audience, or maybe something else that we haven't touched on yet?

Jp Cortez: Yeah, great. I'd just like to talk about the Sound Money Scholarship really quick, Mike. As you know, the Sound Money Defense League in conjunction with Money Metals Exchange offers and awards the Sound Money Scholarship every year. We've been doing this since 2016, we offer money for deserving students, high school seniors, undergrads and graduate students who have shown a very acute understanding of the problems in economics that we're faced with today.

So, every year we award five scholarships. Two to undergrad and high school students, and then two to graduate students. And then we also have People's Choice Award where we get on social media and try to spread the word as much as we can about the essays that these incredible students are writing.

These are questions, essay prompts, that are on the Federal Reserve, and money and (the) gold standard. We have a Blue Ribbon panel of judges – Austrian economists, professors, pundits – who’ll come in and they'll grade the essays, they'll judge the essays and determine the winner.

So, I encourage anyone, any students, if you know any students, please let them know about the scholarship, it's an awesome opportunity, it's a great way to get published. And the deadline this year is September 30th and you can look on Money Metals website or Sound Money's website for more information.

Mike Gleason: Yeah, the only scholarship of its kind, a gold-backed scholarship out there, it's a great thing, and we're happy to partner with the Sound Money Defense League, and we certainly urge anyone to take advantage of that and let's see if we can give away some more scholarships this year to some very deserving people.

Well, keep up the great work, Jp, it's a vitally important cause and we appreciate the time very much, and I look forward to having you on again in the future to update us on a lot of what’s going on these legislative fronts, because I know you're following it and are involved like nobody else when it comes to the sound money related bills. We wish you continued success in those efforts and, thanks again for the time, take care.

Jp Cortez: Thanks a lot, Mike. I look forward to coming back with some good news.

Mike Gleason: Absolutely. Well, that will do it for this week, thanks again to Jp Cortez, policy director at the Sound Money Defense League. For more information or to follow these ongoing sound money efforts, or to even make a donation to help support the mission of sound money advancement, please visit SoundMoneyDefense.org. And in terms of the previously mentioned Gold-Backed Scholarship, you can find that on the Sound Money site or you can also check out details on that at MoneyMetals.com/scholarship.

Mike Gleason: And be sure 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.

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