Lead-Lag Live

Keith Weiner on How Gold Outshines Bitcoin as a Long-Term Investment

• Michael A. Gayed, CFA

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Step into the world of precious metals with our fascinating guest, Keith Weiner, founder of Monetary Metals. Ever wondered how you can earn interest on gold, an asset traditionally seen as non-yielding? Keith reveals his journey from tech entrepreneur to economics PhD, and unpacks the innovative strategies his company uses to lend and rent gold to businesses. Learn how these practices reflect the broader economic system, particularly in the context of a debt-driven economy and the historical value of gold as a measure against the declining dollar.

Curious about the dynamics between gold and Bitcoin? We break down the historical price fluctuations of gold and the factors driving its market. Post-COVID, the gold market has shown a bullish trend, but what about Bitcoin's role as "digital gold"? Keith and I critically examine Bitcoin’s volatility and why it fails to serve as a stable store of value compared to the timeless reliability of gold. Through this comparison, we challenge high-conviction beliefs in Bitcoin and its limitations, particularly for those seeking stable, long-term investments.

We also journey around the globe to understand the burgeoning demand for gold in places like China, Turkey, India, and the Arab world. Despite dwindling volumes in Western Europe, gold prices remain high, driven by regional economic conditions and currency devaluation fears. Additionally, we explore the roles of silver and gold in today's economy, the potential of silver bonds, and the implications of holding precious metals in various forms. Keith provides a rich perspective on these topics, blending historical context with contemporary insights, making this episode a must-listen for anyone interested in the intricate dance of monetary policy and precious metals.

The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

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Speaker 1:

My name is Michael Guyatt, publisher of the Lead Lag Report. Joining me for the rough hour is Keith Wiener of Monetary Metals. Keith, a lot of people know about you and know your background, but for those who don't do a brief intro on your background.

Speaker 2:

So I was your classic computer nerd in school, went off to computer science major, dropped out because I got bored, wanted to build a software company, which I did, called Diamondware. I sold that to Nortel Networks August 19, 2008, right before everything went over the edge, started to become fascinated with markets and economics as things were crashing, trying to figure out how to protect myself, eventually came to the not accredited. I couldn't get a job with this as credential, but got a PhD for something called the New Austrian School, studying money and gold and credit and all that sort of stuff, decided my next company. I wanted to be part of the solution. How do we fix this monetary system that's going off the rails, taking us all with it? And the idea was pay interest on gold and that will draw gold into the market. So that's what Monetary Metals does. I'm the founder and CEO of Monetary Metals.

Speaker 1:

So the first obvious question is how in the world do you generate income on something that has no yield?

Speaker 2:

Well, if you think of gold as money, money itself doesn't pay yield, but the use of money to finance productive enterprise is what generates yield.

Speaker 2:

That um rents metal to companies that need metal as inventory or work in progress jewelers, fabricators, coatings, plating companies, uh, refiners, recyclers there's a whole bunch of different vertical industries that um need gold, and quite a bit of it generally. If it was copper at four dollars a pound, you know you just buy it and not worry about it, but gold being $2,300 an ounce, you've got to finance it somehow and they're happy to pay a lease fee or a rental fee for the privilege of getting that inventory that they need. The other is lending, and so we lend to companies that have a metal income. Right now we have a silver bond open that is to finance a silver producer called Bunker Hill Mine. It's in northern Idaho. They need money to refurbish and update a plant and get restarted at the mine that had been in historic production, and the repayment of the silver plus the principal, plus the interest, will come out of their production. They produce silver.

Speaker 1:

Okay. So whenever I think about any kind of income stream, I of course think about valuation. Right, it's sort of the old school way of how it used to be. How do you value a stock by looking at the cash flow potential? Can't really do that with gold and silver and other metals in general, but I am curious given your years of experience, how do you think about valuing gold and silver separate from the income that you're able to derive from it? Oh, you're saying if gold doesn't have a yield.

Speaker 2:

How do you describe a price to it? Well, that's the funny thing, I mean. In a certain sense, any price or no price is valid. But what we do know is that virtually all of the gold ever mined in human history I used to say 5,000 years until sometime last year I don't know when the discovery was made, but I came across an article about it Some warrior king was discovered, a burial site. This warrior king was discovered in bulgaria, romania, um, dating back 6 500 years ago. And uh, this guy was buried with all due honors and had about seven kilos of gold in his um, you know, tomb, you know, and on this person he had a rod and all kinds of other stuff.

Speaker 2:

So we've been mining, mankind has been mining gold since essentially forever, back to pre-recorded history, really and all that metal is still in somebody's hands, and yet we keep producing more.

Speaker 2:

So the concept of glut does not really apply to gold and any other commodity. As soon as you build up a little bit of inventory, the price crashes. The producers stop and the additional consumers are drawn in by the low price, and so the inventory is worked off until you get back to whatever is a normal inventory buffer in generally a few months. But in gold the concept doesn't apply, which means and this is the key point I made, or one of the key points I made, excuse me, in the debate, the Soho Forum debate with Bitcoin, pierre Pierre Rochard was that the nth plus one ounce of gold is worth the same as the nth ounce, and that means that gold is the thing that measures all other economic values. It's pretty damn hard to put an economic value on gold in terms of something else. All we see is that the actions of traders on the market every day are giving gold a price around $2,300 and change and generally rising, because the thing in which people are measuring the value of gold, the dollar, is generally falling.

Speaker 1:

As you look back at the last 12, 13 years or so of gold movement, what do you ascribe the sideways action to? I mean, that was a prolonged period where gold really didn't do anything.

Speaker 2:

To me and to sort of recapitulate what I was just saying and take it a whole step further. The price of gold is really just the inverse of what's going on, which is the price of the dollar. Gold is the money. The price of gold is really just the inverse of what's going on, which is the price of the dollar. Gold is the money. The dollar is credit, and credit of increasingly questionable and questioned quality.

Speaker 2:

But there's something very perverse in the system, and that is every debtor, which means virtually every producer in the economic world, has borrowed in order to get to their current level of production. If you don't borrow, your competitors will. So it's a nasty game that the Fed has set up. Every producer who's in debt is desperately bidding on the dollar to come up with enough dollars by dumping their product on the bid price, dumping enough product to raise enough revenues, that net of expenses that can service their debts, which means at least pay the interest. If you don't pay the interest, then terrible things happen to you. The creditors come along and seize your farm and your house and whatever else you've pledged.

Speaker 2:

It was collateral, and so one would think that, with all the abuses that the federal reserve, in collusion with the treasury, have committed against the dollar. And, um, you know, there's a very lengthy list of abuses and one would think, with the just sheer quantity of this decreasing quality I call it credit effluent. It it's like this nasty, smelly, you know bacteria-laden stuff that they're pumping out with increasing force from their you know treatment plant You'd think, with a various quantity of this stuff and the sheer stink of it, that the value of the dollar should be going down, which is the inverse of the price of gold going up, but counterbalanced by every debtor frantically, furiously, urgently betting on the dollar to service their debts. And so, yeah, you can have long periods of time when there isn't really an incipient crisis and during those times the price of gold isn't rising, ie the price of the dollar isn't falling. That's not the time point at the moment, but that was the time from, let's say, 2012 to 2018.

Speaker 1:

So I want to share on the screen a post that you put out A rate cut, you say. Who could have predicted that? Even if you're buying into their debunked idea of higher rates leads to lower inflation, why are they abandoning the pretense of normalizing rates? Rates are going to slam back to zero all too soon. That is an unpopular opinion, as I like to say on X, but I want you to flesh that out a little bit, for, whatever it's worth, I tend to be more of a disinflationist, deflationist from a very, very long-term perspective. That's my bias. There is the way that I think about things, because I think, inherently, debt is inflationary only to a point, and then it becomes deflationary when it's too heavy. But what are your thoughts on why rates might go back to that lower bound?

Speaker 2:

Yeah. So let me unpack that, because I think there's about three different ideas that I was sort of playing with. In that one, you know the one quote. Just put it back on the screen, if you would for a minute, because I was just going to read my own words and then, as a reminder of what, can you zoom a little bit? I just can't quite read it on my screen here. One more Zoom, if you can, sorry. Oh, so the first is everybody, for many, many years, during the period of, you know, flooding the market at zero interest rates, everybody, including the Fed, was saying well, you know, eventually, you know, when the crisis is over, we will normalize rates.

Speaker 2:

And at the time I was pretty sarcastic about it with another unpopular opinion saying look, you know, the interest rate is a downslope, you know, since, you know, going back to 1981. And sure, there's been zigs and zags along the way, but it's a downslope. Where on this almost straight line, you can almost put a straight edge on it? Where on the straight line would you point to and say that's, quote-unquote, normal. But they were persisting. They have to maintain the excuse me, the fantasy that you know they're going to go back to normal. And you know, a couple of years ago now about two and a half years they said okay, well, now we're going to start hiking rates. The crisis is over, inflation has gotten hot, blah, blah, blah, blah, blah I'll get back to the inflation and interest rate thing in a minute, you know and this will give us a chance to go back to normal. All of a sudden, it's like their inflation number so-called, you know, cools off by whatever measure that is, and then suddenly it's like oh yeah, we're going to start cutting. Wait, I thought this was supposed to be returned to normalcy and now you're back to cutting. Why and I'm being sarcastic I've been saying interest rate structure is going to slam back to zero, which I'll get to in a minute.

Speaker 2:

But the other thing I wanted to address first was this relationship between rates and consumer prices, and I always like to put it this way there are many, many harms, grievous harms, done to all the participants in the economy when the Fed distorts the interest rate, first of all, and then when the interest rate is too low or zero. It's enormously harmful. But if you were willing to overlook all of the harms and focus only on consumer prices, you should want lower rates because lower rates make a business case for producers to borrow more to add more productive capacity. Suppose you own a chain of 49 hamburger restaurants. You always have a business case, which means an Excel spreadsheet in your back pocket for the marginal store, the one you haven't opened, the 50th unit in your chain and you're not opening it because the bottom cell is red ink. It says you're going to lose money. And then let's say the Fed forces interest rates down another tick and you plug in the new interest rate, the new borrowing cost, the new interest expense, which is a significant expense in your spreadsheet and, lo and behold, the red ink turns to black. And now it makes sense to build that store and you and every other hamburger store hamburger chain owner, plus all the manufacturers of hamburger grill equipment, porcelain tiles, plate glass windows, you name it everybody suddenly has a fresh, new, additional incentive to borrow more to add more productive capacity.

Speaker 2:

So a time of falling interest rates is a time of soft, if not outright falling prices. If you want to hike interest rates, you render all of the capital investments that were made with lower interest rates and therefore lower returns on capital. You render them all sub-marginal. They all have to be liquidated, they all have to go out of business, they all have to be destroyed. And with all that supply coming off the market, then consumer prices have to go up. So they have the relationship exactly backwards in their theory. But even aside from all of that, the problem is the forces that are dragging interest rates down and have been doing so for 40 years, continue, which is a diminishing productivity of debt. That is, each fresh newly borrowed dollar is producing less and less revenue, less and less income, and so you have to constantly, exponentially, be adding more debt just to keep GDP even. And when are we going to get there? I couldn't tell you whether it's next month or eight months from now, but-.

Speaker 1:

I think the higher rates inherently strengthen the position of the oligopolies and gives them more pricing power. Because they have so much cash, now they're earning higher interest on it and, to your point, all the competitors which are smaller can't do their NPV net present value calculations. So good luck, right. Of course, you're going to have, oddly enough, more inflation with higher rates.

Speaker 2:

Yeah, I mean the return on capital ultimately has to be above the cost of capital and your way that does tend to. I mean, it hurts everybody, but I think it tends to hurt the bigger players a bit less than the smaller players. They don't have the balance sheet strengths that are more tenuous, you know. They're more brittle, uh, you know, versus the bigger companies that have other means of raising capital, um, including equity, um, you know, and so on, but, um, you know, anyways, uh, yeah, that's, that's pretty much it.

Speaker 1:

I, uh I submitted a piece to investor place earlier today, um, making the argument that, uh, rising unemployment would actually be bullish for gold. Not because I'm doing any kind of historical analysis, but just because it makes sense to me that, as the economy slows down, as unemployment rises, there should be a pickup in demand for non-correlated assets.

Speaker 1:

And there really aren't that many non-correlated long-only assets aside from gold primarily and a couple of other, but gold is sort of the main one. Do you think we're in now a legitimate secular bull market for gold? I mean, it's been kind of hovering around here right over the last two months. I think there was a lot of excitement around gold in April when I kept on highlighting the concerns around Japan and also you had that risk of war between Iran and Israel. Right, it was a flight to safety dynamic. You kind of paused there. But is this the pause that refreshes or is this the distribution?

Speaker 2:

I think and you mentioned unpopular opinions that I may have held I was pretty unpopular in the gold and silver space from 2012 to 2018 because every time there'd be a blip in the price, you know all the gold pundits would come out I shouldn't say all, but many of them, most of them would come out and say you know, this is it to the moon? And I would show my analysis looking at the gold basis, which I do and say this is not the blips that you're looking for. This is not sustainable. It's about the speculators betting it off of leverage in the futures market. Price is not going to remain, you know, elevated and sure enough didn't.

Speaker 2:

That was a down to sideways market, but post-COVID, something definitely flipped. And now, as you pointed out, this year, this calendar year, again, I think we are in a bull market in gold, which is really a bear market in the dollar, of course, and yeah, I think it's durable and there's going to be zigs and zags and corrections. The market says, well, what about this and what about that? Inflation is coming down. Maybe I should sell my gold, but you know the possibility of war in the middle East, or Ukraine, for that matter, it's not over, so I should buy gold. You know, it was all of this noise that adds to it, but at the end of the day, um, the dollar is, you know, slowly failing and, um, you know, that means that it takes more and more of those failing dollars to buy an ounce of gold.

Speaker 1:

So I got a kick out of uh one of your posts, because those that have also followed me know that I will occasionally take screenshots of uh, bitcoin and cryptocurrencies when they're up big or down big, admittedly more when they're down big, and I'll just say store value, and I saw you did the exact same thing right On an independent say what's the word for something that goes from 71K to 57K in under a month in quotes? Store value. And I don't have anything against Bitcoin or the Bitcoin maxis. It's just, it's more a question of definitions. Store value can't have tail risk, which I would argue means gold is also not a store value. We can maybe debate that. But let's talk about volatility. Gold volatility is very different than Bitcoin and yet everybody wants to make that comparison that Bitcoin is digital gold Can we debunk that.

Speaker 2:

I was going to say there's no similarities between Bitcoin and gold whatsoever. And they say these things glibly oh, it's digital gold. Well, it's not actually like gold at all. You know Bitcoin has a pre-programmed I argue, centrally planned cap on its quantity. Gold does not. You know there's been gold mining. You know, so far as we know, 6,500 years there's going to be gold mining as far as we can predict for another. You know thousands of500 years. There's going to be gold mining as far as we can predict for another thousands of more years, because the marginal utility of gold does not diminish as quantity goes up. Bitcoin they were.

Speaker 2:

You know Satoshi was terrified of that, and so you know he put a cap on it. But that means that Bitcoin can't respond to increases in demand with increases in quantity, can only respond with increases in price. And then when you get a price trend going, then of course all the speculators pile in with leverage and then overextend it, and then you get these giant corrections and then you know, boom. You know the volatility is massively high. And you know the point I try to explain to the Bitcoiners is the concept of drawdown. You want to say this thing is money.

Speaker 2:

You know, pierre, in that debate, said, yeah, this is savings. And I said, okay, if it's savings, then that means it's suitable for an 80-something-year-old widow, an octogenarian widow with no further income potential in the rest of her life. He said, yeah, that's right. I said okay, but what do you tell her? And of course, we had the debate right after Bitcoin had fallen from, I think, 69,000 to 16,000. It was just right after that fall. I said what do you tell this lady who's put? You know, you told her to put all of her life savings into Bitcoin and just lost 75%. You know, what do you tell her to do?

Speaker 2:

And then, in his time to this was the final rebuttal. I didn't have a chance to say anything. After that, he stands up and he says, well, I tell her to buy more. And uh, I'm just kind of mimed to the audience of, like you know. And uh, gene epstein, the moderator, is kind of like you know, you can't, you're not allowed to say anything. I'm just like you know.

Speaker 2:

Anyway, the audience picked up on it. That was a preposterous thing, you know to. So it has these massive drawdowns. Now, you're right, gold has volatility when measured in dollars and I think that was one of the pernicious, insidious things by making the dollar irredeemable, by severing its link to gold, what President Roosevelt did for American citizens in 1933, and then to foreign governments and foreign central banks, nixon did the final deed in 1971, then you know, if you're a conservative saver, then gold is off the table because it's volatile.

Speaker 2:

And you know, if you have a chunk of money comes in and you have to set that aside for an expense you anticipate in six months or a year, year and a half or whatever, buying gold, you know there's a risk that you have a drawdown. Of course that risk in Bitcoin is amplified, you know, orders of magnitude greater than it is in gold. But yet you do have the problem in gold as well, and that's one of the reasons why a lot of people won't, dare you know, hold it as the volatility. The risk of the drawdown is unacceptable.

Speaker 1:

Yeah, it's funny, mr Gene Epstein. I interviewed him on his faces over a year ago, but it's like that would never hold. There would never be an argument you'd make in court. I'd buy more for my 85-year-old, 86-year-old grandmother if all their savings were in Bitcoin. Of course, that would not hold in court with a lawsuit if you're a fiduciary.

Speaker 2:

That's right. And on top of it, he had said he would recommend she put 100% of her savings in already. So how did she buy more anyway? I mean, the whole thing was just absurd and outrageous.

Speaker 1:

I have to say it is a? I don't know what it is. I don't know if this is sort of emblematic of a high conviction, almost like cult-like beliefs in certain things, but the narratives that you hear on the extremes when it comes to Bitcoin are almost always the same and they're always said with the same level of confidence, independent of who the person is. I've always found that to be amazing. It's almost like it's one voice that's very consistent in the message, independent of who the individual actually is.

Speaker 2:

Yeah, and obviously they get their talking points from certain books the Bitcoin Standard and obviously Michael Saylor but it's kind of an interesting thing. I'm not particularly a big fan of skepticism as a philosophy, but when you see Bertrand Russell or Ralph Waldo Emerson or Henry Thoreau, you know these types of guys are like. You know, the people who know nothing are absolutely strident, fervent in their zealous certainty and the more somebody studies, the more they realize they don't know. And there's a certain kernel of truth to that. I mean, I sort of reject it on a lot of levels. But to see these generally young people who haven't really thought about, they don't really understand the concept of drawdown, and they're sitting here waggling the finger at me saying you need to read about Bitcoin. You don't understand the first thing. It's like, really, I've been writing about Bitcoin since before you were old enough to have a bank account there, kitty, but they have this fervency, this zealotry. The red lights in the eyes is an appropriate visual for it.

Speaker 1:

There's a great quote. I'm blanking on who said it, but it's something along the lines of I'm not young enough to know everything. I think it's very appropriate when it comes to that. Last time you and I chatted, you were mentioning, I think, you were off to Dubai and I asked you the question what in the world is going on in Dubai for a guy who's as busy as you? And you said the demand for gold is exploding. So I want to talk about gold demand picking up in other countries. Obviously, we're US centric, everybody always thinks about the US but there's been some real movement when it comes to China and to your point on Dubai and Middle East. So lay that out for the audience.

Speaker 2:

So I would say broadly so the US, but also the entire Anglosphere, australia, new Zealand, canada, the UK. You know demand for gold right now is more abundant, has been, for you know, some time. We talked to bullion dealers. Volumes are down 50 to 75 percent. You know from where they were bullion dealers. Volumes are down 50 to 75%. You know from where they were, let's say, two years ago Western Europe and even Germany. Who's the big gold buyer in Europe? You know demand is way down, but there were four. And so people say, well, why is the price up? And then for a while, I think it kind of stopped. I don't track this too closely, but for a while there were even outflows out of the ETFs. Oh my God, the ETFs are outflowing. How can the price, you know, hold up? I would say the same thing, which is the gold market. You know total gold. Out there is this vast ocean, and whether a little bit of gold sloshes from one vault to another or one corner of the market to another, that has no predictive power on price. Etfs are not the be-all and end-all. Maybe they're a good barometer of Western sentiment, but anyways, there are four worlds that are buying gold as rapidly as they can get it and they have capital controls that limit how much they can get.

Speaker 2:

In most of these places that's China number one. So the Chinese yuan is under pressure to go down. The Chinese government is forced to defend it by buying yuan, selling dollars. So people say it's de-dollarized and I say yeah, and when it's fully de-dollarized it'll be like when the spider sucks the last bit of juice out of an insect or is left over as a dry husk that's discarded as worthless. But the Chinese people don't trust the government, they don't trust the currency, they don't trust the investment markets, they don't trust the banks, they don't trust the property market in China anymore, because that's kind of rolled over. And so they trust one thing, which is gold. So they want to buy as much gold as they can. China is limiting how much gold can come in. So then you get premiums, china, you know, relative to the world markets. But there is gold obviously coming in, and, uh, chinese demand is, and, and generally asia, and the same story is true whether it's thailand, vietnam, um, you know, they're buying gold, um, number two. And so that's an anti-yuan, anti-chinese government play and that's really important to emphasize that, because that was these four, three ofuan anti-Chinese government play and that's really important to emphasize that, because that was these four. Three of them are anti-local government local currency. Only one of them is really anti-dollar play.

Speaker 2:

Number two is Turkey. Possibly incipient hyperinflation, certainly very rapid devaluation of the currency. I went to the Grand Bazaar when I was in Istanbul last year. I must have seen over 100 booths, you know stalls that sold gold, one Bitcoin kiosk in the whole place and you know I was asking about it and people said, oh yeah, you know pretty much anybody that has any wealth or money in this country would have at least 10 grams of gold. The average person would have a lot more than that, which is remarkable because the average American would have exactly zero ounces or zero grams. They're buying as much as they can. The government is limiting it by quotas. There are various ways that. You know there are loopholes. Through the quotas, gold is coming in and you know demand is insatiable at the moment.

Speaker 2:

The third is India. I mean, india is always a buyer of gold, more so now. And of course, it's an anti-Rupi, you know play. It's not that the Rupi is undergoing hyperinflation, it's just that the Rupi is doing what it's always done, which is the Rupi goes down at about 7% a year against the dollar and, as we just discussed, the dollar is not exactly going up either, and so the Indians are always buying gold as much as they can, and there are import quotas and other things.

Speaker 2:

But the Indians have a variety of ways of working around that, one of which is they can go abroad and buy jewelry, wear the jewelry and fly back to India with it. So they go to Dubai, they pick up some necklace that says the store says no, make 0% making charge, which means they're selling at its spot, and I took out a calculator and calculated it absolutely is. I picked up a necklace it's 83 and a half grams, almost three ounces, of 24 karat gold. This is monetary. People call it jewelry. This is money, let's face it. This is not for wearing every day, this is for storing money in a form that works. Anyway, they can wear that piece of jewelry, fly back to India and then, if they didn't want it in India, they can immediately sell that to a refiner or someone within the trade, because there's a 15% import duty on imported gold in India but only a 5% VAT on gold jewelry in Dubai. So they pick up a 10% gain on any bit of gold they buy in Dubai. And so I imagine there must be, you know, huge numbers of Indians. You know flying to Dubai buying gold and then flying back and the amount that they make on the gold to import it. You know, offsets, whatever the cost of the airfare in the hotel in Dubai.

Speaker 2:

So, again, and that's an anti-rupee currency, the Turkish or it's an anti-lyric you know play the Chinese is anti-Yuan play. Finally, you get to the Arab world and that's the one place that it's hard to make a case that it's an anti-local currency play. Those currencies in the Gulf region are generally pegged to the US dollar and unlike, let's say, the Chinese Yuan, for example, or any banana republic in Latin America, for example, those pegs are actually stable. You look over a 30-year graph it's as flat as a table. I mean, they really are flat. Those people do not have to worry when they go to sleep at night or they're going to lose half their value when they wake up in the morning or Monday morning after a weekend. Those currencies are stable.

Speaker 2:

Yet they are buying gold as well, and I think that's the one where they certainly love Americans. I've certainly had a great welcome and a great reception there. But they don't love American not necessarily American foreign policy, but certainly American monetary policy and I think they're buying gold as a hedge against the insanity of look at our election and whatever you think of the two candidates and whichever one you prefer, but they're both. One's over 80, one's nearly 80. They're both big spenders, they both lie, they both, you know, do all these things, you know. Look at what the Fed has done, look at the amount of debt the US government is racking up, and they're buying gold, you know, as a hedge for it. And so there's four worlds that are buying gold, even if the Western world is not.

Speaker 1:

I'm surprised you didn't mention Japan, because I would think that the way the yen's acting, you would see a pickup in gold demand there.

Speaker 2:

There probably is. I have not visited Japan, so I don't really know a lot about it. I'm not in a position to comment. You're probably right. There's probably a pickup of gold buying there, I would assume, so just given the way the currency has acted.

Speaker 1:

What about silver in all this? I don't know if this is still the case, but it used to be the argument that silver was poor man's gold and you had a ratio and they would typically stay within a ratio relative to each other and if it got too far off they converge. Things like that. Let's talk about silver for a moment in terms of the gold demand and if there's a commensurate demand pickup in that metal.

Speaker 2:

Well, obviously there's been a price pickup, so somebody's buying it and I don't think it's suddenly as of 2024, suddenly it's solar demand or antiseptic countertops demand or whatever. Clearly it's monetary. So I was on a panel at a precious metals conference some years back this might have been pre-COVID, even who knows some years back, this might have been pre-COVID, even who knows and a co-panelist was talking about silver and had all these graphs and statistics, excuse me looking at silver to see if it correlated with other commodities like crude oil and wheat, cotton, copper, and I was like I wonder where he's going to go with all this. And then, sure enough, and it wasn't really correlated terribly well with any of them. And then he pulled up the correlation with gold. And then there it was Silver traded, highly correlated with gold, although obviously the gold-silver ratio varies in a pretty wide range. So I'd say, yeah, silver's money.

Speaker 2:

Historically, silver was the money of the wage earner, the farmer, the craftsman, the artisan, small savings held by the people, generally in their own hands at home, under the floorboard, so to speak, whereas gold was obviously, you know, for wealthier people and more generally was kept in the banks. I think that's largely true today. So if the wage earners are doing well, you know, and not just here but around the world, then you'll see, you know, a pickup in silver demand. If not, then perhaps not, but of course so. Gold is a capital asset, trades against other capital assets. Anybody that has real estate or stocks or bonds, bitcoin, right, any capital asset. You know gold is in the mix or could be in the mix if they choose for it to be. And you know silver again being more of the wage earners, uh, you know venue, but the capital asset class can, of course, choose to focus on silver if they wish, and it's, it's possible. Some of that's happening and it's possible that in the rest of the world the people that can't really here's the thing psychologically.

Speaker 2:

I mean you can buy, um, you know istanbul gold refinery makes it. Uh, you know there's a few others that make. You can get a one-tenth of a gram little wafer of gold floating in a little plastic window and a credit card size thing they call a certicard. So I mean you wouldn't want to hold that piece of gold. It's so small. You put it your pocket, it'll get lost in the lint just about. But you can get it in that Surticard. But there's no psychological satisfaction to that tiny little chip in that little plastic window that you know you can see it but you can't touch it. The same amount of silver might be two or three ounces. That is a real heft in the hand and I think the psychology of that should not be underestimated. And what was I going with all this? I but anyway. So people they're buying silver if gold is. They can't buy enough gold to be satisfying, and I think that's clearly going on as well.

Speaker 1:

Got a question from YouTube. Keith said debt is deflationary, but surely that only applies when it's being paid down, not when it's being run up by trillions per year. What do you think about that?

Speaker 2:

Well, the point I was making earlier is that when productive enterprises are borrowing, they're borrowing to do what? To increase productive capacity. Your hamburger chain has just added 2% more hamburger production capacity. I'm assuming all your competitors have the same spreadsheet in their back pocket. The entire supply of hamburgers just gone up 2%. So is that going to cause an increase in the price of hamburgers or decrease that price of hamburgers?

Speaker 2:

Now, obviously, when the government borrows in order to just dole out free monies, that fiscal policy of just giving out free money is of course going to tend to drive prices up. But the broader point is that there is an arbitrage between the cost of capital and the return on capital. Return on capital is significantly above cost of capital. Productive enterprises will borrow more to add capacity, which of course pulls down return on capital, and they'll keep doing that until return on capital is marginally above cost of capital. So even yes, during the process of borrowing that tends to have a damping effect or a softening effect on prices. And then, of course, the other half of the question once they're stuck with that now, they have to service it essentially forever, and that is enormously a drag, a burden on all the producers and the perverse reason why there's such a ferocious bid on the dollar that never relents because of all the debt of all the debt.

Speaker 1:

You had sent me a DM saying you wanted to talk about silver bond, which I don't know what that means. But so educate me and the audience on silver bond what we refer to.

Speaker 2:

So a bond is when somebody issues a debt instrument to finance something, and so Monster Metals right now is. We have an open deal in our market. We are financing a loan to a silver mine called Bunker Hill. They produce lead, zinc and silver, and so when we do a silver or gold loan, we price it as a bond offering. It's just like a conventional bond, except that it's denominated in silver, with interest in principle Paid in silver. It happens to be paying 12%, and so for accredited investors only. But any accredited investor who wants to A get 12% return on his silver and B help bring gold and silver back, remonetize and bring them back into the market, then they should contact Monetary Metals to consider participating.

Speaker 1:

Peter, outside of gold and silver, what else are you particularly excited for from an investment perspective?

Speaker 2:

You know I hate to say it, bitcoin, because I can already feel the slings and arrows. You know I hate to say it, bitcoin, because I can already feel the slings and arrows coming. No, you know, look, I'm a well-known guy that takes my punches at the Bitcoin punching bag and you know I'm all. You know, my shield walls are up for that. I almost hate to say it, but I think there's got to be one massive drop in the interest rate and therefore 10-year treasuries, 30-year treasuries are going to be a hell of a play sometime here.

Speaker 1:

I would love to see it because that's been the bane of my existence the last three years, tactically speaking. But if you're going to have a massive drop in yields, presumably that coincides with a massive drop in equities. I mean sort of your return to flight to safety, risk off, traditional stocks, down yields down to fight to safety, risk off traditional stocks down, yields down.

Speaker 2:

There's a lot written about that and what people say is when the Fed drops interest rates, that's a harbinger of a drop in equities. And I think the reason is pretty clear, which is the Fed is dropping interest rates because they're in a panic, because something is happening. The Fed doesn't really care about the stock market. I know everyone says there's a Fed putt and this and that, but they don't really care about stock prices and they don't really care about whether you have a job or not either. They care about one thing, which is the solvency of the banking system, and particularly the large crony banks, which are the Fed's clients, and which means that they care about credit. If there are defaults that are starting to come, then that means that the banks are going to take massive losses and it'll blow holes in their balance sheet. So that's when the Fed tries to come in and of course, their game is okay now we'll lower the interest rate. By the time they're doing that.

Speaker 2:

It's kind of a game of too little, too late. If you look at what they did in 2008, they slimed interest rates to zero, but by that point the crash was already baked into the cake. But in general equity valuation we're talking about cash flow. You have to discount future cash flows. You discount that using some discount factor and I argue that the discount factor should be the market rate of interest or maybe the market rate of interest applicable to that company. So if that's a major corporation with double a credit, then you should look at what AA credit costs and use that as the discount factor. So the lower the interest rate goes in theory, the higher equity prices should go.

Speaker 1:

Got another question here and then we'll wrap up. Let's see here From YouTube is there any advantage to holding your gold? Got another question here and then we'll wrap up. Let's see here from YouTube Is there any advantage to holding your gold in the form of jewelry as opposed to coins, slash bars, for instance? I'm thinking jewelry might be less likely to be confiscated. I guess it depends on how nice the jewelry is in your neighborhood, but let's tease that out a little bit of it.

Speaker 2:

So, um, you know, unless you're in the middle east or india, the, the bid-ask spread on jewelry in the west is much, much wider than um, you know what they borrow us, and so what you really should be looking for is as the narrowest bid-ask spread. I? I personally don't think confiscation is, uh, an issue. If you look at, there's two reasons why roose, two reasons why Roosevelt confiscated gold in 1933, why he made the whole move to basically pull it out of the monetary system. One is he wanted to stop the run of the banks, because in those days the gold was deposits, and when people were withdrawing their deposits it was causing one banker after another to fall over, and he wanted to stop that. So he said, okay, you can't have gold anymore. And number two, he wanted to get control over the interest rate. Every time somebody pulled a gold coin out of the bank, it forced the bank to sell a bond, which pushes the bond price down and the interest rate up, and he wanted interest rates to go down. And so this was monetary policy.

Speaker 2:

Today, gold has nothing to do with the monetary system. I just don't think they care, and if they want to grab a lot of loot they can look at the IRAs and 401ks, which have not only a lot more wealth in there, but there's a very small number of custodians for that. What is it? 15 trillion or whatever in the IRS and 401ks? It'd be a much easier thing to grab. Congress can do it just by simply changing the rules for tax deferral. They can say oh well, to retain your tax deferred status, now you have to have X percent of your retirement account in these spiffing new treasury retirement bonds that we're going to issue. That pay oh look, we're paying 5%. And if they do it right after the stock market crashes, I think people would be cheering it rather than screaming. They'd try to grab the gold. They'd be going door to door and they would discover that there's a very high correlation between gun ownership and gold ownership. I don't think that would go very well.

Speaker 1:

That correlation does not vary very much over time, and that's where there is causation beyond the correlation. Uh, okay, for those who want to track more thoughts, more your work uh, where'd you point them to and just maybe talk about monetary metals a little bit more and we'll wrap up so monetary metals is a.

Speaker 2:

You know our whole uh, reason to exist is to pay interest on gold and silver. Um, check out monetary-metalscom we have 60 some odd unique charts on the gold and silver markets. We have all kinds of analysis commentary, you know content, from macro to gold price to everything else. Um, and then um, my twitter handle, just scrolling in the bottom of the screen, is at Real, keith Wiener.

Speaker 1:

Appreciate those that joined the live stream. Again, this will be an edited podcast under Lead Lag Live on the YouTube channel and hopefully I'll see you all next time. Thank you, keith, appreciate it.

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Michael A. Gayed, CFA

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