Rising Gold Prices and the Global Economy Explained
Galane Gold Ltd (TSX-V:GG) (OTCMKTS:GGGOF) (FRA:25G) Chairman Ravi Sood talks to James about rising gold prices and the catalysts related to it’s ongoing increases. Ravi explores the geo-political relationships between the USA and China and how that relates to precious metals. He also goes into detail about the American debt to GDP ratio and what that means for the future.
James West: Ravi Sood joins me now. Ravi, welcome back.
Ravi Sood: Pleasure to be here, James.
James West: Ravi, the big news of the day: gold at this moment is trading at $1,505 USD. Clearly, it’s on a bit of a tear, up almost 15, 16 percent in the last month, highest level in seven years. What are the fundamentals globally driving the price of gold currently?
Ravi Sood: Well, I don’t think the fundamentals have changed much, the drivers for gold. What’s changed is the narrative that is behind those fundamentals has started to catch a bit of a tailwind, and people have started to accept in the mainstream. And so, going back to what are those fundamentals? One, you’ve got central banks printing money relentlessly; that hasn’t changed, that’s been true for a long time. You’ve got zero or near-zero rates, and now probably the single biggest catalyst is the fact that we’ve gone from this rate hike cycle to a rate cut cycle, and we’re looking at now probably easing, other forms of quantitative easing, being put back in place.
And so that narrative is, all those fundamentals have been true for many years, but that narrative is now catching wind with the mainstream, and that’s now being reflected in gold price.
James West: Sure. So the interest rate situation and the quantitative easing situation: is that whole sort of convergence aggravated intensely more so than normally, it would be, by the brewing trade war between the United States and China?
Ravi Sood: Of course it is, and when you think about why was gold sidelined for these last many years? And it’s been sidelined drastically, and it’s been sidelined less drastically over different periods of time, it’s because the US dollar has emerged as the de facto reserve currency in the world, and if you have United States, which has suddenly gone into a posture – maybe not so suddenly – of increasingly alienating its trade partners, the willingness to look the other way on the ballooning deficits and the just completely improbable and mathematically implausible Federal debt in the United States underpinning that US dollar, your supposed reserve currency, your risk-free currency, the willingness to look the other way just goes down. And it goes down really fast.
The other fact is, you have China as your most critical trading partner, and that’s the person you’re alienating the most right now. So there’s no question, that’s part of it.
James West: And China owns, what is it, 30 percent of all the US government debt?
Ravi Sood: Of course, and the fact that you have the Chinese owning that huge part of the debt and being a critical player in that market, and Chinese citizens and savers looking also at their holdings and their savings, and (unintelligible) [0:02:47], and saying, what am I going to do with this? At the margin, in a gold market that’s been starved, it’s been in a bear market. Yeah, it’s had a few leaps and recoveries over the years, but it’s been painful for years and years and years.
At the margin, you start to introduce those new buyers back into the system, and boom! The bull has burst through the gate, and you know, even the gold bulls amongst us have been shocked at this price action, at how fast and how dramatically it’s moved.
James West: You bet. Carmen Reinhardt, a rather famous PhD economist, penned a essay called Financial Repression that basically outlined how governments use this tactic of bringing interest rates to nothing to essentially take their debt and foist it onto the shoulders of the savers in society.
Ravi Sood: Of course.
James West: So I’m looking at all these factors, and I’m looking at the very finite gold market, and in the past, it’s been in the futures market that has allowed a much higher dollar value participation in what is not really the gold market, but is a paper version thereof.
Ravi Sood: The paper gold market, yes.
James West: Right. And so I’m curious as to your opinion as to why now has that futures market sort of dampening effect lost its ability to dampen the effect?
Ravi Sood: That’s a great question, I think a critical one that we need to be asking ourselves continuously through this process, and I think if you look at the facts – and remember I said, these facts have been there a year ago, two years ago, two months ago, and we didn’t have the reaction in gold price – so, what really has changed? Yeah, you had the change in the stance of the Fed. The reality is, you have a US government that, to put it in real terms, had 8 trillion or so debt when Obama became President, now has 22 trillion in debt. The – most economists will tell you 60 percent debt to GDP is kind of a red zone; you’re starting to get into troubled territory. 90 percent is the point of no return. You’re around 110 percent in the US now. There is no conceivable way for them to get back onside. Historians will tell you, they’ve had a great history of inflating the debt and then contracting it.
There have been periods in time, World War Two, for example, the debt’s blown up, and then there’s been a huge peace dividend. So they’ve gone back to economic boom, there’s been all sorts of rationalizations, productivity increases, and they’ve done a great job of it, and that’s been the great history of the United States.
But this time, we had the feed the beasts kind of government policy of the Republican era, George W. Bush, and the debt exploded. You had wars in Iraq, you had wars in Afghanistan. And then you had a government that came into the global financial crisis. It had no choice but to feed the beast even more; you had no peace dividend, you had no contraction of that debt, and it just snowballed out of control.
Add to that the Social Security system, I was just talking to someone earlier today, I mentioned it ran a $9 trillion mark to market deficit for the past year; it’s now a $43 trillion deficit in the US Social Security system.
James West: Nine trillion just in one year?
Ravi Sood: In one year. And these numbers, you can’t wrap your head around, but again, you talk about the 22 trillion being over 100 percent debt to GDP; 43 trillion is 200 percent of your GDP, so you’re talking 300 percent, and those are real obligations. It’s not some exotic derivative; that’s somebody who’s expecting those payments.
James West: Watching the mailbox, waiting for them.
Ravi Sood: You know, if you grew up in Venezuela, maybe you did not expect to get your pension. You had years and generations of being completely screwed over.
James West: Right.
Ravi Sood: But nobody in the United States is saying, You know, I have to factor in the fact that I’m not going to get it. Well, the reality is, those numbers just don’t add up. 300 percent debt to GDP? There’s going to be a monetization, a so-called debt jubilee. This money needs to somehow be grossly devalued in real terms.
James West: If it was a public company, it would be rolled back ten for one.
Ravi Sood: Exactly, that’s a great analogy! You need to increase the denominator, so you need to keep printing money, you need to monetize this. And you need some really clever mechanism to do it, because the traditional ones haven’t been working. We haven’t been able to find an inflation. Central bankers have pulled some levers and pushed some buttons, and it hasn’t worked.
So your question is a very interesting one, because I wonder, has something changed now, that the mechanism that has perhaps suppressed gold price for so many years, has now decided maybe we need gold price to be higher? And the speed at which the gold price has moved in this run-up, okay, there’s lots of positive technical factors at play, and flow of funds, as I mentioned earlier, but maybe there’s something else afoot here, too. And I think we’re not going to answer that question today, but that’s a great question to keep asking ourselves as this bull market plays out: is there something else happening here that we don’t know about, that’s going to be an important part of that ultimate monetization or debt jubilee.
James West: You bet. All right, Ravi, that’s a great conversation. We’re going to continue that as gold continues to embarrass the US dollar incrementally.
Ravi Sood: I hope so.
James West: I’ll look forward to talking to you again soon. Thanks for joining me.
Ravi Sood: See you soon, James.
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