Is It Time to Go Digging for Gold?

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1:24And now to the top analysis of today's markets.

1:34Can gold save your portfolio? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is George Milling Stanley, Chief Gold Strategist at State Street Global Advisors. Hi, George. Thanks for being with us. Hi, Maggie. Thanks for inviting me. Always a pleasure to be on Real Vision. And it's great for us to have you on now because from the beginning of 2023, gold's been on everyone's mind. And we've had people ask about it all the time and wonder about timing. If they were in it, should they get out? If they weren't in it, can they get back in? So we're going to kind of dive in and break this down today.

2:10And I just want to start sort of broadly with your sort of investment framework for gold right now. We're sitting right off that 2048 level that hit back in April, got above 2000. A lot of people got excited. We've drifted down below that and we're kind of in this range now. So what's your outlook for gold? Let's do a little shorter term, say over the next three months or so. What are you expecting? Okay, look, gold's been flirting with this$2 ,000 level for the best part of a decade now, Maggie. We were very close there in 2011. We actually got through there in 2020, got through there again last year and again this year.

2:51At some point, I think we are going to make that decisive breach, but clearly we haven't done so yet, which is why the price is trading a little under that$2 ,000 level right now. But my expectation, I don't know whether it's going to be in the next three months, but in the next six to 18 months, I feel very confident we will make that decisive breakthrough, the$2 ,000 level. It often takes any market, it can take quite a long time to persuade investors that now is no longer the appropriate time to be taking profits. $2 ,000 was the right level to be taking profits for 10 years. And that kind of mindset can become embedded with investors.

3:30And it's going to take something interesting, possibly a recession. I don't know what it's going to take. It's going to take something interesting to push us through there. You asked for a three-month forecast. I think there's a very, very good chance that we could, in fact, see prices consolidate above that$2 ,000 level within the next three months. But I'm not going to make that a solid forecast because, you know, It has taken us a long time already. It could still take us some time. Right. Okay. Well, that's fair enough. I just like to give a time frame instead of talking generally because it can be very different.

4:02I think that what's so frustrating to people who like the concept of gold is the fact that for 10 years it's disappointed. So how do you get at it? Is it just that it's been consolidating or is it just a situation where it's not going to work like it did in the past? I think that's what people who watch this sort of decade range start to think. You know, I don't think gold has been disappointing, quite frankly. I would take issue with you on that. If you think about it, in 2019, the gold price was up 18%. That's really pretty good performance. In 2020, with the advent of COVID early that year, gold price was up 25%.

4:44So it shouldn't really have been a surprise to people that in 2021, we got a little consolidation. The price dropped 4.5%. And then last year, basically, it went nowhere. It finished the year at almost exactly the same level as it had started the year. But just to take that 2022 performance, gold went nowhere. The equity market in the U.S., the S &P 500 was down 16%. Global equities were down 18%. The ag U.S. bonds were down about 11 percent. Global bonds down even more than that. Real estate down. And let's not even get into the cryptocurrencies that succeeded in a two-week period in 2022 in losing$2 trillion off a$3 trillion market capitalization.

5:31Fair enough. So we can't look at just price. You have to look at relative performance. And you have to look at the role it's playing in your portfolio because sometimes it's capital preservation. Yeah, absolutely. I think the other thing that's worth mentioning, those percentages, the 18 % in 2019, 25 % in 2020, the long-term annual average price appreciation for gold in the 50 years that I've been looking at it, so since 1971, has been around 7.75%. So we were way ahead of the game in 2019 and 2020. We're starting to get back into some reversion to the mean, if you like. And I also think that the big headwind for gold last year was the extraordinary strength of the dollar against just about every other currency.

6:17It was at 20-year highs against all the European currencies, for example. And I think that that was one of the problems for gold in 2022. That was what kept it from really, really soaring. And I think that the dollar probably peaked in October of last year. We saw a 4.3 % decline in the trade-weighted dollar in November of last year, the biggest monthly decline in a decade. And we haven't really seen much positive from the dollar. It's gone up a few percent, down a few percent each month. But we haven't seen a strong continued gain in the dollar since then. And if that extraordinary dollar strength is over, if other currencies are going to revert to their means and therefore move up against the dollar, then I think gold will move up in line with those other currencies.

7:05And that's really the scenario that I'm looking for for the rest of this year. What impact does the Fed have? So we have a PCE out tomorrow. What about Fed rate policy? Is that something that you're watching in terms of gold's performance? And what impact will that likely have? You know, I watch, obviously, what the Fed does very, very closely, mostly because everybody else is watching them very closely. So I'd be a fool if I didn't. I have to keep a very close eye on what they do. But it's interesting. I think that Fed policy last year raising rates as much as they did, especially those three 75 basis points hikes in the fall, which was really Jerome Powell smacking the markets upside the head and saying, pay attention, I'm taking inflation seriously.

7:55You need to take inflation seriously as well. All of that, I think, I don't think that was what hurt gold. I think that contributed to the strength of the dollar. And as I said, it was the strength of the dollar that hurt gold. And I think that's really the difference. If you think about it, if we look at periods when the Fed has been in sustained tightening mode, and by sustained, I mean a couple of years at least, consecutive years, and we haven't had that yet. We've only been in sustained tightening mode for, I don't know, a year and a half, something like that. We're still not at that two-year point.

8:28But between December 2015 and December 2018, the Fed raised rates nine separate times. The gold price is supposed to go down in conventional wisdom. It didn't. It went up 21%. Between June of 2004 and July of 2006, that's a two-year period, the Fed raises rates 17 times. Gold doesn't go down. It was up 70%, 70 % in that period. So I don't think gold has anything much to fear from rising interest rates. Frankly, I'd turn it on its head and say that if I were the equity market, I would be running scared about what the Fed is doing and what the Fed has said it's going to continue to do. I don't think gold needs to worry about rates.

9:13That's so interesting because you will see people mention, oh, you know, if you're in a higher rate environment, you don't get any yield on gold. So you're going to lose out because people could just stick their money somewhere else or they could be in a short term fund. You don't think that calculation or that argument holds water? I think it holds water for the people who believe it, because those are the people who won't buy gold in a rising interest rate environment. But I think they're the ones that typically tend to lose out. I don't know that I could explain why gold tends to do well in a rising interest rate environment, except to say that when we're in a rising interest rate environment and Jerome Powell is saying, I'm going to raise rates higher than anybody thinks I will.

9:58I'm going to keep them higher for longer than anybody believes I will. That, I think, suggests that there's a level of uncertainty, there's a level of anxiety for investors in what the Fed is saying. And I think that that is, generally speaking, very helpful for gold. I remember back in the early 1990s when Alan Greenspan was the Fed chair and he was raising rates for a couple of years. It seemed like every time there was a Fed meeting, there was a 25 basis point increase. and yet hedge funds were buying gold as much as they could possibly get. I was a trader at the time. I was selling gold to hedge funds.

10:35And I remember asking one of the managers of these hedge funds, look, every time the Fed raises rates, it raises the opportunity cost of owning gold. It raises the attractiveness of yield-bearing assets. Why are you loading up on gold? And the response was, look, if the dollar needs this much protection with Greenspan raising rates as he is to keep the dollar at a high level, then it must be in even worse shape than as apparent on the surface. So that's why I'm buying gold as a protection against potential weakness in the dollar. And I think that's a very logical thing to be doing. Interesting.

11:11So when we're looking at, you know, we've got this, so you mentioned a higher rate environment, not necessarily bad for gold. What about a pivot if the Fed pivots? Because the market is, I mean, there's been a lot of conversation about this. We're going to be watching that Fed meeting so closely next week. No one thinks then. But if you're looking toward the end of the year, people do still expect the Fed at some point to start cutting rates. Does that hurt gold? What does that mean for gold? I don't think it hurts gold at all. I think that if rates were to come down, that would be beneficial.

11:45but you know the thing is when we started this year the big question for Jerome Powell whose name begins with P there were three questions they all began with P as well is the Fed going to persist in raising rates is the Fed going to pause and the betting at the beginning of this year was pausing Q2 we're almost out of Q2 now or is the Fed going to pivot at some point and I think the betting in January of this year was that the Fed would pivot by Q3 so what's the reality The Fed has persisted in raising rates and has indicated that it will do at least one more increase. The market is starting to fear that perhaps there'll be a second increase coming up and maybe even more.

12:28Jerome Powell has made it very clear that he will not pause until he feels the economy is on track to decline, that unemployment is on track to go up and that inflation is on track to get down to his long-term target of 2%. And he has said repeatedly, there is no justification for a pivot. There's no justification for us to cut rates as far as we can see in 2023. It may come in 2024. But that comment that he's made every meeting, I'm going to keep rates high. I'm going to raise rates higher than anybody believes. and I'm going to keep rates higher for longer than anybody believes. I'm listening to what he has to say.

13:11I think he's a man of his word. He believes that this is the right thing to do, and I'm inclined to believe him. There's an awful lot of people who don't have real practical experience of inflation. I remember inflation in the 1970s when I was still a reporter in London, getting an increase, wage increase of 10 % a year and thinking this is wonderful, not realizing that with inflation at 25 % a year for three consecutive years, I was losing 15 % in purchasing power every year in spite of those wage hikes. And it's when something causes you pain is when it teaches you the lesson. I don't think there's a lot of people out there these days in the markets who've ever actually experienced the pain that prolonged, sustained high inflation can bring.

13:55Hey, everyone. We're going to take a quick break right now to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

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15:08We've talked about that. I mean, we've been in this low interest rate environment for so long and disinflationary environment that there are a lot of people who haven't experienced it, both in the markets and in the real economy. And, you know, it's been extremely painful. Are you in the camp that we are in an environment where structurally higher inflation is here to stay? Or do you think we will see those inflation numbers start to come down? I think that Jerome Powell will eventually be successful. But I'm inclined to adopt his kind of phraseology and say that it may take a hell of a lot longer than a lot of people really realize.

15:46I think that that's the issue. There's a lot of discussion at Fed level as to whether inflationary expectations have become embedded or they keep talking about the fear that they will become embedded. But if you look at what we have, I mean, inflationary expectations becoming embedded simply means that because everybody is expecting higher inflation, that workers ask for wage increases and employers raise prices in order to meet those wage increases. And because prices are going up, workers ask for wage increases. And that's the spiral that we're talking about. If you look at the most recent CPI numbers, and I think the PCI numbers are showing the same kind of thing, I think that we have already got embedded inflationary expectations.

16:33I think that very, very dangerous spiral is actually with us already. And it's going to take an awful lot to shake that out of the system. Just remember the last time the United States had significant inflation, it took Paul Falker in 1980 to push the Fed funds rate up to 19.5%. I mean, we're still at barely 5 % right now. We still have potentially a long ways to go. I know that that was a 20-year period of inflation that poor Paul Falker had to try to deal with when he came in as Fed chair in 1979. But eventually he did deal with it at the cost of either one recession with a tiny little blip of recovery in between, or was it two separate recessions?

17:17The history books are kind of mixed on that. But it hurt the economy very badly, and that was what really tamed the wild beast of inflation. Everybody said at the time, Jerome Powell has a similar kind of job to do. He doesn't have 20 years of embedded inflationary expectations to deal with. He has maybe a year or so. But I think that he's going to do what he says. I think that he will work very hard to get his target rate down to that 2 % level. Yeah. By the way, for those of you who are not members, we have a robust debate going on the platform throughout the shows, including macro insiders that Raul and Julian do about that issue of inflation, with some expressing your view, George, and then others kind of leaning into demographics and technology, arguing it's a very different workforce labor market than it was in the 70s.

18:11And maybe the same analogies don't apply, but it is a vigorous debate. So I encourage you all to go check that out. Some really interesting conversations. If you're not already a member, you can scan the QR code and figure out how to get access. I think we have some trials now. So we've got some questions coming in, George, and I want to get to a couple of them as we can continue to go through this. I'm going to start with Peter. Yesterday, I met with a precious metals dealer. He told me that 2023 sales are running double 2022 sales. Is that common? Is this common? I don't know at this point because the only information I've got on progress so far in 2023 is essentially anecdotal.

18:56We'll be getting in very early May, we'll be getting the first quarter supply demand figures from the World Gold Council. I think it's just coming next week, in fact, and that I think will be very helpful for most of us. I've seen inflows into gold-backed exchange-traded funds, I think, have been running pretty strongly. That's always, to me, a useful indicator that people are acting on this interest that they've been expressing in precious metals. They've been expressing the interest for some time. I think people are actually starting to take significant action now. That's why the two gold-backed exchange-traded funds that State Street has an interest in, GLD and GLDM, are both up more than half a billion dollars year to date, that would tend to square with what Peter is talking about.

19:48But I don't have the statistics yet, so I'm not going to rush to judgment on anything. So another great question from TrillionX, what do you think about gold as a hedge against stagflation? We get this question a lot. Stagflation is such an ugly word, isn't it? And as I recall it in the 1970s, it was a pretty ugly period for the economy and for those of us who were working at the time. Let's just take inflation. Whenever inflation has been sustained at a high level, and I'll define those terms first, okay? But this is, again, looking over the last 50 years, the experience that I've got. Whenever inflation has been sustained, i.e.

20:34for more than two consecutive years, at a high level, I would put that at 5 % or above. Whenever that has happened, then the annual average price appreciation for gold, instead of being at 7.75%, like I mentioned, over the whole of the last 50 years, within those inflationary periods, it has doubled. It has been around the 15 % level. So if we have inflation, then gold generally tends to do very, very well. If we have a stagnant economy or even an economy that is actually in recession, which I think is a very real likelihood at this point, then I think gold will do even better. When we've had recessions in this country, again, there have been seven significant size recessions in the 50 years I've been looking at gold.

21:24annual average price appreciation over those seven recessions has been better than 20%. And that's in periods when equities have been in negative territory because we're in recession, and when bonds haven't been helping out much either, neither of any of the other assets. So gold always has responded in the past, has always responded very well to recession, to stagflation, to inflation, even just to periods of slower growth. Gold has tended to outperform other assets. And that, to my mind, is one of the reasons why you want to own it when you're in troubled times. We sometimes hear people talking about a choice now between gold and crypto if they're looking for a hedge.

22:08What are your thoughts on that? Is that the competition right now? I don't think so, no. Look, there's a couple of things to say. One is that about seven years ago, I think it is now. I wrote a paper. I was working for State Truth. I wrote a paper, which essentially, it posed the question, think Bitcoin, because Bitcoin was the only one around at the time. Think Bitcoin is gold 2.0, think again. And it basically made the point that at that time, the volatility in Bitcoin and the other cryptos that were coming into the market was really excessive, was much, much higher than the volatility in gold.

22:48And that situation has only gotten worse in the intervening seven years or so. Since Bitcoin was launched in 2009, then its annualized volatility has been running at around 10 times the volatility that gold has shown. And then we have this awful experience of last year when, as I mentioned at the beginning, the crypto universe as a whole dropped two-thirds of its market capitalization in a very, very short period of time. That prompted a lot of people to say cryptos are just another risk asset. It prompted me to say, I don't see this as a strategic long-term investment, which is the way that I tend to see gold.

23:33And it prompted Warren Buffett to suggest that cryptocurrencies were the equivalent of rat poison squared. I wouldn't go quite that far, but the Oracle of Omaha definitely has a point in my view. We're going to take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

23:56Yeah, I had a feeling you were going to say that, George, but but but worth worth discussing. So we have a let's see.

24:09Let's see. These are all such good questions. So let's take this one. And I want to get into a little bit about how we've got some allocation issues. I want to get to those in a second, but I want to try to get to some of the more macro questions first. SBD758, in a liquidity crunch, gold crashes like everything else, always has. Is George expecting a severe liquidity crunch? Why or why not? First of all, do you agree with that? And then do you see that coming? That's not been my experience in that 50 years. It may be if somebody is looking even further back in history that I'm prepared to go, that may be the case.

24:48But I always think that the past 50 years or the period since 1971 is to me a very appropriate period to look at. A couple of reasons. One is when I first got involved. So I've actually been there and involved in gold for the whole of that time. So I've been able to watch this up close and personal. And secondly, 1971 is when President Nixon basically created the free market in gold by ending the automatic right of foreign central bankers to bring their dollar denominated assets to what was literally a window at the Federal Reserve and say, here's your dollars. Can I please have some of that nice gold you store in Fort Knox?

25:29And this was being done by foreign central banks in the 1960s and 70s to such an extent that the U.S. Gold Reserve fell by half. And Nixon was the one who decided to put a stop to that. So we've had a free market since then. What happened before that in liquidity crunches, I don't really know. I don't know that we're in a liquidity crunch. This is the second piece of the question. And there's no question that liquidity is not as freely available now for two reasons. One, because the Fed is raising rates, so it's more expensive to borrow money, but also because the banking crisis has reduced the readiness of many banks to actually lend money, made them a lot more careful in doing due diligence on the people they're lending it to and so forth.

26:12But, you know, we've had a decade where money was basically free. And I think that I don't think that this is a liquidity crunch. I think this is a return to a much more realistic kind of situation that persisted before that. But if the questioner has only been involved in markets over the last 10 years, then the questioner has become very accustomed to the fact that money is free and always will be. That has been the belief in a lot of people's minds. And I'm afraid that was never sensible. I don't know that it was sensible to keep interest rates as low as we did, but I can understand the thinking behind it.