International Man: Gold has recently reached a new all-time high.
What are the underlying factors pushing the gold price higher?
Doug Casey: Three emotions typically move the gold price: prudence, fear, and greed. At the moment, only prudence is dominant, and certainly not greed. Or even fear, even though there’s plenty to be afraid about.
The public seems quite unaware that gold is pushing all-time nominal highs. The gold bull market will likely remain intact, at least until the public is clamoring to get in. We’re no where near that stage.
Public ownership of gold is trivial. They’re just not interested in it. I suspect that’s because they’re concentrating on the stock market, where greed kicked in years ago. Stocks have treated them well for over 40 years; they figure the bull market is perpetual, with just minor retrenchments.
Everybody has a Robinhood account, where they’re trading options and meme stocks. They see gold as an asset for fuddy-duddies and gloom-and-doomers. I think their sentiments will soon reverse, and fear will take over. Fear will draw their attention to gold.
Currencies, including the US dollar, are just the unbacked liabilities of bankrupt governments. The US, in particular, is overindebted. The country has borrowed capital accumulated in the past and is mortgaging future earnings to finance an artificially high current standard of living.
We’ve gone from a time when, as late as the ’60s—before the devaluation in 1971—you generally saved up and bought a car for cash. Believe it or not, people actually saved up to buy a house for cash.
After 1971, we had, at first, two-year financing for cars. Then it went to three, five, then seven years. Now, many people lease their car. A car has gone from being an asset on your balance sheet to a big liability. People rarely have equity in a car, even though it can easily cost twice what the average house did pre-1971.
Before the 1971 devaluation, there was almost no credit card debt; now, it’s over $1.1 trillion. There was almost no student loan debt; now, it’s a trillion and a half dollars.
The whole world, especially the US, floats on a sea of credit. It’s a daisy chain; if one part of it breaks, and one person can’t pay, the next person can’t pay either. The system has become extremely over-financialized.
The average guy no longer thinks about producing more than he consumes and saving the difference. He can’t do that with a rapidly inflating paper currency. He just tries to keep his head above water with debt. If he has a few extra bucks, he tries to get lucky in the stock market.
So, what's pushing the gold price higher? Mainly buying by foreign central banks. They don't want to hold the paper of the unreliable US government. They’re buying gold out of prudence and fear.
International Man: Historically, gold has been negatively correlated with real interest rates. When real interest rates rise, gold prices tend to fall, and vice versa. This occurs because high real interest rates can make US Treasuries more attractive to some investors than gold.
However, despite a substantial increase in real interest rates since 2021, gold prices have reached new all-time highs.
What do you think is going on here?
Doug Casey: Even though nominal rates have gone up from next to nothing in 2021 to current levels around 5%, real rates are still negative.
Everybody watches the government’s Consumer Price Index. However, the US CPI is only marginally more trustworthy than the Argentine CPI. The US CPI is an increasingly political construct; you can’t rely on it.
But you can rely on prices going much higher with the government running $2 trillion deficits and the Fed financing it by buying its debt—essentially printing money. Furthermore, as the economy slows down deficits will go way up, as will the rate of currency debasement.
Interest rates correlate with inflation over the long run because nobody wants to lend money for less than the rate of inflation. It’s just that right now, people don’t have many alternatives. They can own cash, where they’re losing several percent per year.
Or they can speculate in stocks, bonds, or real estate. The problem is that most assets are overpriced because we’re at the tail end of the greatest financial bubble in history.
Central banks basically only own other countries currencies or gold. Unlike the common man, they’re aware the dollar has lost close to 90% of its value since 1971, while gold has gone from $35 to $2500. They can see the trends. I expect both trends to accelerate.
The Fed can manipulate interest rates to some degree, but the market is much bigger than the Fed. As the dollar is debased and the US becomes less creditworthy, the world will dump dollars. Inflation and creditworthiness are the two major things that control real interest rates.
As a secular trend, interest rates are headed higher. I would not be surprised if they exceed their 15-18% peak of the early 1980s. That will be scary, and gold will profit from that fear. Don’t forget that gold hit its first peak of $850 back in 1980, just as interest rates were also hitting all-time highs.
International Man: How does the environment for gold today compare with previous periods? What are the implications?
Doug Casey: The fundamentals for gold are better than ever.
The government says it has 265 million ounces of gold in the treasury, although that hasn’t been audited for many decades. But even if their reported gold holdings are accurate, the number of dollars and the amount of credit are expanding on a hyperbolic curve.
That’s especially true of the amount of purchasing media outside the US. You’ll recall that the major exports of the US for the last 40-plus years haven’t been Boeings, IBMs, or soybeans. It’s been dollars.
The desire of foreigners to continue holding dollars rests on nothing more than confidence. But confidence can blow away like a pile of feathers in a hurricane. Americans have to use dollars; foreigners don’t have to.
If their confidence in the dollar evaporates, they’ll be dumping dollars wholesale. But to whom? Most of those dollars will try to come back to the US in exchange for US assets. Domestic US prices will explode upwards, with more currency and less real wealth.
This is something new. Those tens of trillions of dollars abroad are a time bomb waiting to go off. The US Government will almost certainly react with foreign exchange controls, trapping foreigners holding trillions of fiat dollars.
What will they do? I suspect they’ll panic into gold because it’s the only truly tangible international financial asset. With the exception of Bitcoin, it’s the only financial asset that’s not simultaneously somebody else’s liability.
The bottom line is that even though, at $2,500, gold has gone up a lot, it can go and will go a lot higher. We’re on the edge of a financial precipice of historic proportions. At some point, there’s likely to be a wholesale panic into the metals by both central banks and the public.
International Man: What potential returns do you expect in gold and mining stocks?
Doug Casey: Gold is in a major bull market. But gold mining stocks have always been of greater interest to me because they’re so leveraged. They’re the most volatile class of securities on the planet. Even more volatile than high-tech startups.
One problem with gold stocks is that almost all of them are too small for institutions to buy, and institutions totally control the stock market. In the past, retail investors owned individual stocks; now, money is in ETFs or mutual funds. Gold stocks, with their teeny market caps, are too small to get any respect.
In addition, big institutions don’t want to buy gold stocks for philosophical reasons. They believe gold is a pet rock. To them, owning gold not only gainsays the Keynesian notions they were indoctrinated with, but it shows a lack of confidence in the economy, which is a no-no.
On the retail level, brokers uniformly discourage clients from buying gold stocks because they’re considered to be too risky. And I agree, they are risky.
Gold mining is basically a crappy 19th-century choo-choo train business. Its risks are now bigger than ever before. There huge upfront capital costs, starting with a usually unsuccessful easter egg hunt for a viable prospect.
Then maybe scores of millions more to prove it up, then maybe hundreds of millions to build the mine. All so a government can shake you down for taxes. Compound that with aggressive NGOs, grasping natives, and a hundred other things.
On top of all that, the public hates gold mining because they think miners rape Mother Earth. No wonder gold mining stocks are about the cheapest they’ve been in history. On top of all these things, gold stocks last peaked in 2011.
The good news is that it’s probably the perfect setup. As a trend follower in gold and a contrarian in gold stocks, I suspect the market will turn around, and the average gold stock will move up 10 to one. Some of them are going to go 100 to one, which has happened numerous times in the last 50 years. I think it’s ripe to happen again.