Gold’s Worst Quarter In Years

SPEAKER_02 0:00

Gold's just had the worst quarter in over 10 years, and I'm joined by Clive Thompson to guide you through our views of where we see gold and silver going, the opportunities and also the reasons for our thoughts on this. So the following is a very in-depth conversation, and because it is so in-depth, I've also put together a full research report that covers everything that we talk about, including much, much more, including details on gold miners and so on. And you can download that completely for free at feedixfriends.org slash GS, which stands for gold silver, FelixFriends.org slash GS. I'm gonna jump straight into it.

SPEAKER_00 0:40

Well, it has been a particularly bad quarter, worst in 13 odd years, and something which I must say uh I did not expect. And I don't think most people expected it to go as bad as this. Um those who uh are worried about it, I have to say I'm not worried about it because I've never owned so much silver or so much gold that a decline would worry me. The whole the whole point about investing is you should never own so much of anything that when it goes down, you feel in a panic. Um, having said that, I have been using the decline to top up a very small amount just this week. Um, it's tinkering at the edges, but I

Position Size And Staying Calm

SPEAKER_00 1:20

couldn't help feeling that the bottom might be in, uh just a feeling. Um, but you know, I've got lots of firepower if it goes lower, but I'm not going to be increasing my position significantly, even if it does go lower. Um, so what's gone on? We obviously we had this massive rise in January as silver um hit an all-time record of uh about $125, if I remember rightly. Um and then uh I believe there was uh the appointment of Kevin Walsh, which spooked the market, or at least that's what people said, um, because he was perceived as being quite hawkish. And uh indeed last week he gave a speech which uh kind of in a way sort of reaffirmed that uh he said, you know, the Federal Reserve will not be interfered with by government, and we're very independent, and um we the inflation target of 2%, we you know, we have to get there, and inflation is too high at the moment. So people, you know, he is perceived as hawkish. Now, higher interest rates are generally bad for precious metals, at least that's the way markets perceive it. But what happened in January, that was the trigger. But I think there's also a lot of vested interest. The um bullion banks who are there to make money for themselves, and quite rightly everybody's in the market to make money for themselves, but they have a privileged position. They can see all the stop losses and all the limit orders. And when they see a large number of stop losses lined up below the present price, which was uh over $120 at the time, uh, they can see all what that if they if one gets triggered, it will trigger the next one, and then it becomes a roller coaster. Now, if you're a bullion bank and you can see it like that, uh it's very easy to know that if you start to trigger the stop losses, the price will be driven down as each each stop loss triggers the next one, driving the price down fast, leaving you as the bullion bank available uh you can then wait till you get to a certain level where there's no more or not enough stop losses to keep the thing going. You can then step in and start being a buyer, which means that you now have the option potentially of pushing the price back to where it was. Now that actually that hasn't actually worked for them this time because although it did briefly, they pushed the price back up, we had a nice bounce. Um, the price, the at the size of the fall then triggered a lot of people who'd come in very late in the year, sort of people who'd bought in uh let's say October through to January, uh, who had paid well above $50 an ounce, who said, Oh my god, it's going back to what I paid for it, or it's already gone below what I paid for it. Um, I'm out of here, I'm going to chase the next big hottest thing, which of course the hottest things at the moment is still AI stocks. So a lot of people got very frustrated and couldn't bear the thought of losing any more money. So they started bailing out. So at the moment, the the bottom line is everybody who's got some silver who bought any time after about October is in losing territory. Um, those who've had it for many years probably are fairly they're perhaps all disappointed that with hindsight they didn't sell at the absolute peak. Uh but you know, I I've I've had um gold and silver for well, uh more than more than 40 years, actually. I mean, I I got my first gold coin when I was 14 years old from my grandfather, and I bought my first one uh sometime between the age of 18 and 21. Um I went to Sharps Pixley, I was working in the city of London and bought one at that time, and I continued to buy it. So the the the fact that I bought these coins over the years, and I I never stopped really. Uh, you know, whenever you've got a bit of spare chains, it makes sense.

SPEAKER_01 4:59

Do you still have them? Do you still have your first coin?

SPEAKER_00 5:01

Yes, my grandfather told me to never sell it, and uh he was right. Um he also said I shouldn't I shouldn't tell anybody about it, uh, because I think at the time he gave it to me, it might not have been quite legal to have a gold coin. I'm not sure about that, but uh uh but it wasn't, you know, when it when I got it, it was probably worth about three pounds. It would be worth about four thousand pounds today. No, uh we're talking about sovereignty, it'd be worth about um a thousand pounds or nine hundred, eight hundred pounds today. But uh when I went to get it valued for the first time at the age of 18 or 19 or 20, I went into shops Pixley with my sovereign and said, Can you tell me what it's worth? Uh there was that was the way to find out. And they said, Well, you know, we'll give you 10 quid for it. Uh maybe they said 15 quid, or we'll sell you another one for 20 or 25. And I didn't like the I didn't like the spread, which sounded absolutely mammoth at the time. Yes. Uh not not that I had any intention of trading at all, um, but uh suddenly reinforced my idea to keep it uh over the years, went back again from time to time to check on it, and it was always it always just seemed to be worth more than the previous

How Stop Losses Accelerate Drops

SPEAKER_00 6:13

time. Uh and that sort of led me to be a buyer.

SPEAKER_02 6:16

I suppose there's a lesson in that, though there is there is a different value, and institutions have quite a lot to do with the value that we pay, right? So I think I I agree with a lot of what you just said. I think the wash coming in the beginning of the year certainly spooked markets. Um, we also have to realize, I think, as gold and silver owners, that we don't make the market, right? There are market makers who do that, who work on the exchanges. Uh and they ultimately, their trading ultimately determines the actual price. Now, you some people might think that well, it doesn't actually determine the actual value, but in the short term, at least or medium term, the whole price finding is happening on you know Comix um or along the metal exchange or whatever, which is all sort of the same thing. So yes, there is money to be made and things going down, right? And they might be they might be shorting it and they might be they're aware that the people who at least the smaller traders on these exchanges use a lot of leverage. So you can squeeze them out fairly easily by changing the marginal requirements or that kind of schnelling and so they did. So I think there is a lot, um, yeah, it is, it isn't. I always think it's it's a peculiar market because it isn't really a very um, well, sort of independent price finding kind of a market, because the people who run the markets are private institutions who run them for profit, um, which is a bit different to like the stock exchanges

CFDs And Leverage Traps

SPEAKER_02 7:34

and so on. You have a lot less interest in what goes up and down.

SPEAKER_00 7:37

There's a huge amount of business being done globally in what's called CFDs, contracts for difference. Um now, these are websites which basically are retailing or dealing with retail customers who can leverage up five, ten times what they what they have. Um now the the retail customer won't be putting a limit as such. He can, but he won't be actually putting a limit himself often. He'll say, Oh, I'm going long silver or going long gold, and he'll buy buy it for ten times what he's got or five times what he's got. But behind the scenes, the CFD website has to have a limit. And where do they lay those limits off? They lay those limits off on uh uh on Comics so that that now becomes visible to the big boys in the bullion markets who can see where all those limits go. So if the price goes down below a certain limit, the CFD website is selling and then simultaneously taking out the small trader. And they do say that uh nine, I mean the numbers vary according to which CFD website you read, but they do say that 90% of people dealing in CFDs lose 90% of their money in 90 days. It's called the 90 90 90 rule.

SPEAKER_02 8:53

90 rule, yeah. CFDs are an absurd instrument of gambling uh in a market that you have no control over. So it's definitely the the I mean to donate the money to somebody, I I always say, like, don't bother with CFDs. Um but a lot of your viewers and a lot of my viewers still bought gold at the you know 5,000, whatever. They bought silver above a hundred because most retail investors' strategy is buy what's popular, what's gone up a lot, sadly. And it's a strategy of sort, but not a very good one. And it's something people hopefully will make a bit of an impact here with which today's video. But those guys are sitting on pretty significant losses. They're they're still holding, right? Um, you did a video earlier in the year and you referenced a sort of a 140-year-old study, and it showed that you know, after these kind of crashes, uh there was some hope, right? Could you walk us through that in a sort of summary? I think people might find that interesting.

Why Timing Tops And Bottoms Fails

SPEAKER_00 9:48

Well, uh it's more of a stock market study than a study of gold and silver, because the history of gold and silver really isn't that long. We only go back to 1971 in terms of uh a free market price. But uh history does show us that uh when stock markets crash, uh they it it does vary. I think the Great Depression is a is a different situation. But when stock markets crash, more often than not, uh the last phase of the crash is very, very fast down, and then there's a sudden and furious rebound, which then leaves a lot of people saying, I wish I had bought at the bottom. So the perception changes from I wish I'd sold at the top to I wish I'd bought at the bottom. Um and you know, by the time people get around, they say, Oh, I like the price, and by the time they get around to putting in their buy order, uh, it's already too late. And I I I've seen that in countless crashes. I mean, when I say countless crashes, there are not that many, maybe five or six, to be honest, in my entire career of 50, 60 years. Um, so five or six crashes. But what what we always experience after there's a short, sharp sell-off is people who wanted to come in and buy at the bottom, but they've it the reality is they always missed the bottom. And as we go into the bottom, people are usually selling literally at the bottom. The one I remember specifically was the 1987 crash, where we got the call to sell everything on the Friday. And due to a hurricane in London that day, the brokers weren't at work and we couldn't get through. Uh, so we had to send a fax, but that fax was not picked up until the Monday morning, which was Black Monday, so you can guess what price the seller sold at. It was obviously the worst price that he could ever have had. Um, there were obviously people on the other side who came in as buyers, uh, but they weren't buying at the price he was selling at, they were buying at a much, much higher price. So what what what I can tell you is it doesn't make sense to try and guess the bottom or the top. You can't nobody can do that. What if if if you don't have enough of something, you should be buying very gradually. And if you're checking the price every five minutes, you probably have too much of it and you shouldn't be buying any more, and maybe you should be thinking about whether you top slice it.

SPEAKER_02 12:07

Yeah, I think I think that's a very good lesson. I think most people who are concerned or worried to a degree where they're not sleeping, or as you say, refreshing their their broker every five seconds, it is it is a position that's always too large. And I think that's the the simplest risk management is always just like just just have less of the particular thing that's worrying you. Uh, so I appreciate you you you mentioning

Stablecoins And Forced Treasury Demand

SPEAKER_02 12:29

that. Um now if we zoom out a little bit into sort of macro land, um there are quite a lot of things happening in the US right now with the the the dollar uh the government might be seeking to weaken it. Uh we've got the Genius Act, which essentially creates an artificial demand for US government debt, in my view, to artificially suppress interest rates. Um on the face of it, could actually be good for gold and silver, because a weaker dollar and lower interest rate would in theory be that. But it creates with it, I think, an attempt to devalue or deflate away the the whole debt. Because that's historically the only way anybody's ever gotten out of that kind of a hole that the US has got itself into with all the debt, which would then make a lot of people think, well, if there's a lot of inflation, then my salary and my cash and my bonds and so on are going to be uh not the greatest place to be. So isn't therefore the inflation hedge still gold and to some extent silver? I think that's more of an industrial demand view. Um do you have a do you have a view on that? On on the sort of madness that's happening there today. Like I think literally yesterday, 140 US companies announced one new stablecoin. And we're talking about you know the great and the good of finance, Visa, Amex, you know, BlackRock, like pretty much every major US corporation working together. Now all the money that sits in that will have to go into US debt and they will keep the interest because they're not legally permitted to pass the interest on, which is really a way of forcing companies to put their money into something that you know is is perceived zero risk. So as I ramble on, um, d do you have a view on that? And do you think this is positive or negative for metals?

SPEAKER_00 14:19

The the plan of every over-indebted government is to keep kicking the can down the road. And that means they have to borrow, continue to borrow more, and they have to find new borrowers to lend them money. So any sort of plan to force people like the stable coins to buy treasuries has got to be a good plan for the government because it creates a demand which might not otherwise be there. But that you can only go so far uh to create new demand. Uh and you have to do everything you in your power to stop destroying demand. So confiscating other countries' assets isn't encouraging countries to buy your debt. But on the other hand, if you can put your uh effectively dollars into a stable coin which can be used and traded by people in every country on the planet without too much regulation and supervision, um, because their local local banking system doesn't work very well, um that's great. You've created a new demand. So you've got this, um certainly we've got this new demand coming for the the dollar, but it it's not going to change the fact that the level of government debt is going to continue to rise as far as we know it compared with GDP. In other words, the debt to GDP is rising. It's uh according to the Congressional Budget Office, it's could it's forecast to continue rising ad infinitum. And there will come a point, and there always comes a point, where you get to a level of debt to GDP where suddenly there's a because of an internal situation or an external situation, there's a crisis of confidence. Now there's no hard number for that. Nobody can say it should be at 60% or 100% or 120%.

SPEAKER_02 16:06

Look at Japan, right? It's been running this for how many decades now?

SPEAKER_00 16:10

Exactly, but things might be starting to go wrong with Japan as we speak. We don't know. It it does look a bit precarious at the moment. Um but what what I'm saying is it's not like um 100% is better than 150%. It's all to do with the confidence. So where the government debt sits at the moment is somewhere in between I have full faith and trust in my government to I'm not sure about this, I want to get out fast. So we're somewhere in between the two. So what would if there is a shift in the confidence levels, it could result in uh rapidly falling demand for treasuries and therefore higher yields, making it more and more difficult to finance the governor for the government to finance it, in which case you get a a debt spiral, as the uh as we had uh briefly a few years ago in the UK before the uh government stepped in and asked the Bank of England to buy every guilt they could lay their hands on with a with a guarantee from the government that they'd see them good for the

Bond Markets Overrule Governments

SPEAKER_00 17:14

losses.

SPEAKER_01 17:14

The Liz Trust moment, who was PM for about 45 days or something, was that huh?

SPEAKER_00 17:18

That that's right. It's known as the Liz Trust moment. Um obviously it was nipped in the bud, and uh governments uh always have uh their uh contingency plans to deal with all kinds of scenarios, because we can imagine they they have they must be uh have contingency, they will they do have contingency planners for all scenarios, and they have a range of things that they might or could do in different in different circumstances, but it doesn't mean to say that everything they might do is going to work.

SPEAKER_02 17:48

But the reality here is we can in that case, sorry, Eric Lyre, in that case, the the bond market basically overruled the UK government, right? The bond market just floated with its feet and said, no, you can't add that much debt, you can't spend that much money, so the government changed. So the the the the these bonds, I think people have a misunderstanding that interest rates are set, say, by the Fed in the US, where really, yes, they had to set an interest rate, but the ultimate interest rate is actually set by the market, by the bond market. So you can see, even with very low interest rates, you could have in reality quite a high one, which is we've seen this briefly in the US, we're seeing it in Japan at the moment. Um, and that then makes it very, very hard for the US to, well, it just adds more and more expense to the debt they already have because they have to refinance it.

SPEAKER_00 18:35

Um I'll add one more thing to what happened in the UK, because this might happen elsewhere, uh UK, USA, Europe, or Japan. One of the features of the rapid sell-off in GILTs in the UK was it turned out that most many of the major holders of UK GILTs had something that nobody knew they had, which was a kind of derivative instrument which was designed to enhance their yields on guilts for something which was never supposed to happen, except it did happen. And when it did happen, it meant that there they were pushed into a situation. I won't go to the full details because I I had forgotten all the deals, but it basically meant they were pushed into the situation of being forced to sell gilts at low prices, it's a bit like selling a put, in other words, uh, which they didn't want to do at that time. And that that meant the pension funds were on the hook to lose billions and billions of pounds, but because they were going to effectively be forced to sell gilts at ever lower prices, uh, a bit like the stop losses being hit, uh and which is why the government had to set step in. So what how could this why is this relevant? Well, throughout the world, there are derivatives and forward contracts and all kinds of instruments which are not known about, which are off balance sheet, and we don't know what's going to come next. But over the over the over countless years, we've seen from time to time incidents where a company somewhere has got caught short because it was far too long in whatever it was, copper or lead or uh of some foreign exchange currency, and suddenly something breaks and they were at the wrong end of it. So we don't know if something will break, but the point is you don't know what you don't know. And when it comes, you need to be prepared. And when it comes, of course, you don't know how big it is and or where it's going to go. I mean, the classic example of this was the 2008 crisis, where it wasn't the fact that there was a whole bunch of mortgages which couldn't pay the interest, it was the fact there was a whole bunch of derivatives on the mortgage-backed securities. So we had uh mortgage-backed securities which didn't have any mortgages, but which were priced based on the price of other mortgage-backed securities, which were based on the price of other mortgage-backed securities. So you had one at the end with real securities, and then you had one, each one was a derivative of the other. So when the first one failed or started to fail, the impact was far, far bigger than just a few people not being able to pay their mortgages.

SPEAKER_02 21:04

Sure. And I mean, there is this hideous interconnectedness of all the financial institutions. So I think governments are very scared of it now. Even if you let a minor bank fail, there's a potential it could knock off one of the bigger banks somewhere in the world because they might own or have issued them one of some of these contracts. So, which is perhaps I think why we're seeing so much government intervention, because we're getting bailed out for absolutely everything.

SPEAKER_00 21:27

There are obviously many potentially weak points, but one of the weak points which might happen is related to commercial real estate.

Commercial Real Estate As A Fault Line

SPEAKER_00 21:35

Um, over uh, you know, ever since the beginning of time, there have been commercial real estate buyers who typically buy with borrowed money, and typically they've got a certain level of rent, let's say five or six percent of the purchase price coming in, and they have been able to borrow money if we go back uh seven, eight years ago, at relatively low interest rates, because LIBOR in USA was at a quarter percent, so they could borrow maybe in 3% of LIBOR. So they could borrow, let's say, at three and a quarter, while they had maybe five or six percent coming into rent, a nice deal, and they had the interest rate fixed for five or ten years. Now, as those fixed rate loans are starting to mature, the interest rate, the interest rate is no longer LIBOR of a quarter plus three. It's more like uh the the current prime rate of uh four and four and three quarters, uh three and three quarters plus another four. So they're paying seven and a half or eight percent. When now, yes, they were getting five. Now the rents might have gone up by 30%. That means they're getting maybe six and a half percent on the original purchase price, but the the interest rate now shooting from let's say three and a half to seven percent, those deals are no longer profitable. What does that mean? It means that the as these deals mature, the banks are gonna say you need to put up more collateral or you need to sell, but the the next buyer isn't going to pay the price you paid because at the price you paid with borrowed money, he's making a loss. He's got to have a much, much lower price in order for the deal to work with borrowed money. And the much, much lower price means that that uh rental yield, uh, even if it's gone up to six and a half on the original price you paid, has now got to be eight or nine to cover the seven percent you're paying on borrowed money. So what I'm saying is we don't know the extent of these types of loans throughout the banking system everywhere in the world. It's not just the USA, let's face it. Um, but as they mature, we might get into a situation where some of these commercial properties are now having to be sold off as effectively as forced sellers, depressing the commercial property price, which then depresses the value of the bank's collateral, which in turn means that the banks will have to start writing down the value of their loans. And that, of course, could spiral because you've got lots of smaller banks who are interlocked with the larger banks, and we don't know where it goes. Now, I'm not forecasting it's going to happen. I'm just flagging it as one of those things we have to be aware of that banking isn't guaranteed to be 100% safe always.

SPEAKER_02 24:08

I think I think it's definitely guaranteed to that people will take too much risk because it's the it's the incentive structure, right? I mean, you know, bankers are typically there for a relatively short period of time. They get paid a bonus at the end of every year. And once they're no longer there, they're not personally on the hook. So I think the incentive is just take more risk than you should and hope it's going to be fine for the next, say, five to ten years, and then you retire. So I think it's a bit of a strange structure.

Gold Revaluation And Gold Notes

SPEAKER_02 24:33

Now, you also talked about something else, um, which is US dollar re uh or rather the gold revaluation by the US government. And my my view on that, I think, might differ slightly from yours. I don't think they're going to do it. So the the US government has got a ton of gold, I don't know how many million ounces, 200 and something million ounces, I think. Last time I checked, uh, and they're valued at about $40 or something like that on the books, right? So if you revalue that to today's price, of course you'd have a massive balance sheet gain. Um I think the theory behind it though is that that would somehow reduce debt. I don't think the market will buy it. I think the market is too smart to realize it. Uh, what it's actually nothing has changed. And therefore, I don't think you're going to get lower interest rates or any particular impact. So I sort of think it's a paper exercise. But I think you might have a slightly different view on that. So I'd love to hear it, Clive.

SPEAKER_00 25:32

Well, of course, it is an accounting trick and it is a paper exercise, but there is a positive consequence for any government which does it. And the positive consequence is they are basically swapping interest-bearing debt, which has to be repaid, for non-interest-bearing debt, which is perpetual and never has to be paid. And the mechanism for doing that is that the government would sell its gold through a sale and repurchase agreement with the Federal Reserve. It's not kind of not without precedent. They did something very similar back in 1934, and except it was more of a one-way ticket as opposed to back to front. But sale and repurchase, so basically they sell the gold to the Federal Reserve and immediately buy it back. But when the Federal Reserve pays for it, they pay for it with newly printed cash, which can then be used to fund the current year's deficit and to some extent to fund maturing debt. Consequence, debt goes down. What they are paying to the Federal Reserve when they repurchase that gold simultaneously is what's called gold notes. The Federal Reserve has got a lot of gold notes from when they did the exercise last time, so it's not like it's new. The feature of the gold notes is that they don't bear interest and they're not part of the national debt. So effectively, um the national debt goes down because they now are using the cash they got for the electronic cash, of course, they got from the Federal Reserve to fund their current spending without having to borrow. So nothing's changed. They're not spending more, they're spending the same. So that's not there's no more, there's no more or less inflationary than it ever was. But the level of debt, instead of rising, has suddenly gone down. And as debt matures, they're using the money they've got from the Federal Reserve to repay some of that debt without having to borrow money to do what because what they're doing at the moment is they're borrowing from Peter to pay Paul. So as debt matures, they have to borrow some from someone else to repay the old debt plus the interest. But if they've got the money, they will be able to repay without having to borrow. What that does, it shrinks the supply of new treasuries, which creates artificial demand. Oh, well, actually, not to create demand. We assume the demand doesn't change, but the supply goes down. And supply going down means lower yields, which is makes the government's funding that much easier. So step forward a year or two. Uh that when they've had a year or two when there's been a dearth of treasure issues, there wouldn't have been any. Uh, the market's begging for them, and they'll be able to, when they eventually have to get back into the market and issue new debt, they'll be issuing it into a market where there's a lot of demand and yields are much lower.

SPEAKER_02 28:22

Okay. No, I I I do see your point. I still wonder whether the market will not just see through it and go, okay, you've done this little accounting trick. Um, but ultimately we know you're going to be still running up trillions of extra debt all the time. Um so I don't know. I'm I'm still a skeptic on it, but I I'd be interested to see if you're right. Um and do you think does it have a positive impact on the gold price?

SPEAKER_00 28:48

Um first of all, it does happen. I'm sure that you and me and plenty of others will be out there on YouTube calling it an accounting trick and uh just just moving paper around. So, you know, we we can have great fun with it when it does happen. Um, but there's a strong, you know, there are strong arguments for it to happen. Uh and what would happen to the gold price? Well, it depends on how they do it, but you know, if it's just an accounting trick and uh the gold price doesn't have any substance behind it, the new price, uh that wouldn't be good. So I think they probably have to stand behind the new gold price as the you know, we we're willing to swap gold, in other words, uh we're gonna be willing to buy it off you at the new price, whatever the new price is. So that does put a flaw under the gold price. And anything with a floor is worth more than the floor.

SPEAKER_02 29:37

In theory, yes. If the government is the US government an active gold buyer? I don't think they are, are they?

SPEAKER_00 29:43

Well, they would be at $42.22.

SPEAKER_02 29:47

If you went along, I think I think there'll be quite a lot of people who be buying at $42.50. Um I certainly would be. Um okay, interesting.

SPEAKER_00 29:57

Um but yeah, if you put a floor under any price, if you say it can't go any lower, it immediately acquires option value because there's only one way it can go beyond that, and that option value makes it worth more.

SPEAKER_02 30:09

Okay. Is this sort of the um the Roman kind of uh, you know, let's clip the denarius or whatever, but they did. You know, they sort of like actually a lot of empires did. They started with a gold coin and then they put a little bit of bronze into it, or they started with a silver coin and they put a little bit of uh something else into it. Is is is is is that sort of where we're heading

Debt Driven Inflation And Asset Prices

SPEAKER_02 30:30

with this?

SPEAKER_00 30:30

In a way, it acknowledges what has been happening over the last hundred plus years, which is the um never-ending increase in government debt, which ultimately gets monetized by turning it back into money. Um we mustn't forget the money a lot of people talk about the money supply as being the cause of inflation, and that definitely was the case throughout most of history. The situation these days is we have to take into account government debt because it's liquid, uh it can be turned into money at at any time. And of course, it is a promise to print the money down the line. So the real inflation is not the M1, M2, M3, which can be manipulated very easily. It's it's the money supply plus the amount of debt which exists, and you can discount that back, uh, but then you've got to add back the interest. So it's it's really it's really the normal because it's paying interest anyway, it's it's effectively the nominal amount of debt.

SPEAKER_02 31:28

Um and and actually most US government spending does actually flow into the economy, right? They pay for goods and services. So they then the money is actually in circulation after they spend it.

SPEAKER_00 31:39

As people, as the government borrows money, it's spending it, that goes into the hands of someone. Ultimately, that someone hands that money over to the wealth gatherers. The wealth gatherers are the businessmen, the big businesses, the big boys. But they say, What are we gonna do with this extra money? Well, they're not gonna pop down to the shops and bid up the price of mobile phones or uh or buy more pizzas or sausages or eggs. They're gonna look for something else to buy, like a luxury house by the sea, or uh maybe uh uh a rocket to Mars or whatever, whatever their uh pet thing is.

SPEAKER_02 32:13

They're gonna buy something which is stocks and shares or you know, gold or some sort of asset or something that they can.

SPEAKER_00 32:20

They're gonna park it in financial assets. And this kind of explains why financial assets have been rising at a faster pace for many decades than inflation.

SPEAKER_02 32:30

Yeah. And I I I always say to me, the real measure of inflation is basically how much the SP goes up a year. So I sort of see inflation at that level, which is you know, what is it 17% last year? I think about 25% the two years before that. So extraordinary inflation over like four years, you basically have almost 100% inflation. And I think that's kind of where we're really at with that. And I think that's why people better be not in a really irresponsible way, but I think people need to be invested. I think the sitting on the sidelines is the most expensive and risky thing you can do.

SPEAKER_00 33:04

Yeah, at the end of the day, when that money is created, it's going to end up somewhere. Uh, of course, you can manipulate the way people feel by good news and bad news, and push uh the that that means the the the amount the the propensity to hold gold or equities or property will change up and down over time. But in the long run, more money means there's going to be more people out there at various propensities to hold, which will uh in the long run likely push up the price of rare assets which are desirable. So as long as uh equities remain desirable because they are increasing their profits and they're likely to do so if there's more money on the planet, as long as gold remains desirable because it's rare uh and so forth, the the better. Okay.

SPEAKER_02 33:48

So you you mentioned that.

The Bear Case For Metals

SPEAKER_02 33:50

I mean, do you see a bear case for gold and silver? I mean, we saw the war in the Middle East. Allegedly, Gulf states were selling gold because they're not getting the dollars from the oil sales. Um, we saw Turkey do some sales type structures um in the market because they need dollars. Is is this a turnaround? Or at the same time, we see a lot of other emerging markets, uh central banks buying gold very heavily at about double the rate we've seen historically. Um, do you see that there is a reasonable bear case to be made for gold and silver?

SPEAKER_00 34:27

Certainly the higher oil price due to the Middle East War created forced sellers from a couple of central banks, most notably Turkey. Um and we don't know, I don't know how much they sold. I think we've got the figures in for perhaps uh January, maybe the first quarter, but I haven't got them in front of me. But I they made a substantial sale. Uh other countries may have been in the same situation, which we don't know about, because uh the you know they have to keep the economy going with the petrol. So the this would be countries which don't have enough oil might have find themselves in dire straight. So the first thing they would have sold would be the treasuries, second thing would be the gold, or maybe a bit of both. Do I think we're in a well, we we're in a bear market for gold because a bear market is uh it's not a strict definition, but most people view it as a 20% decline from the high point. And when you're in a bear market, there's no rule which says it stops at 21% or 25% or any particular number. Uh and uh so I I don't think I can say uh whether we've passed the bottom last week, which we went below 4,000, or whether whether we uh have are on our way back to 3,000. I don't know that. What I can say is I'm quite happy that I can continue to buy gold, I will continue, and I have been, uh, at uh from time to time when I've got a bit of spare cash, it makes sense to increase the number of coins I've got. But it's you know, once again, I want to say it's not the only asset I invested. I I like to be very diversified, and I don't want to end up in a situation where I've got so much in one particular asset that I'm saying, uh, well, you'll always say I wish I hadn't hadn't put so much in, but I don't want to have so much in one particular asset where I say I've now got no choice, but I have to bail out of it. That that would be a bad situation. So, you know, diversification across all asset classes, and the more you can find, the better it is. And that, you know, that means you can even hold things which I don't particularly like, which is cash or bonds. Um, you know, so so to the extent you hold bonds, I think they should be very short-dated uh and uh high credit quality. And to the extent you hold cash, I think it needs to be in a place where you can trust the counterparty and trust that you can get it back in that hurry, but also know that you don't have too much exposed because you know that every day the government is devaluing that cash by uh debasement printing more.

SPEAKER_02 36:51

Yeah, and spending more for sure. For sure. And I agree with you on that. I think you know you I think everybody should have some cash. I think it's a responsible thing to do. But you could have it in short-term bonds or something, and that might at least pay you something, so you're not losing losing all of it. But um I mean, I think I think the biggest bear case for me would be a stronger dollar. Um, if somehow inflation magically disappeared, uh, or at least the market believed it did, and somehow they managed to strengthen the dollar. But I I I doubt it because I don't really see how the US could really deal with it uh from a debt point of view.

SPEAKER_00 37:27

I don't think people are focusing on the word inflation when it comes to investing in other things anymore. Um, I I think that was definitely a word uh which I used throughout my career. So it was and historically very, very relevant. But I think people are starting to turn their attention to what comes next. And what comes next? We're living in a world of governments across the world becoming more and more indebted, and there doesn't appear to be a way out of that. Uh so people are saying this can't carry on forever, and historically, uh there comes a time when governments become so over indebted that confidence erodes. And when confidence erodes, it erodes very rapidly. So it can be steady as you go, and then suddenly it falls off a cliff for no reason at all. Well, it's not there's never no reason. There's a reason, but the point is it's not not a reason that you can know today because it's new information, new news, something which happens, it can fall off a cliff. And when that happens, it becomes impossible for a government to fund itself and they have to take drastic and urgent action. And of course, they've got lots and lots of contingency plans that they could take, but none of those plans are going to be good for the holders of cash or bonds. If you're the man in the street, I'm quite sure you're gonna be absolutely fine, you have nothing to worry about. So if you're Joe Public, the the the 90% of the population who are average, you'll be fine. But if you're the top 10% with uh hundreds of thousands in the bank, you need to be careful not to be overexposed to money or your government. Because they won't let they won't they they they won't let you keep too much of it. Of course, those type of people, they're going to be fine because they're gonna have stuff which will get them to the other side houses, equities, gold, silver, yachts, golf courses, whatever they happen to own. So from one point of view, they'll be fine, it'll be just like a sudden tax. The monetary part of their wealth will go poof up in smoke. And they'll be the the people who will suffer most are likely to be those who are not voting in the countries where this happens. So if you happen to be uh, let's say somewhere in Asia, you happen to be an Asian central bank, or you happen to be uh an Asian institution holding a lot of, let's say, dollar assets, there's no particular reason why the government of the United States would feel any particular obligation to you if it needs to do something with the currency which would effectively devalue it for everybody but their own population.

SPEAKER_02 40:06

Yeah. I think I think you're right on that. And I think that's also why you're seeing a lot of, you know, you mentioned Asian countries significantly reducing how much government debt they own, US US debt they own, right? And I think that's also why we're seeing the stablecoin legislation. I mean, Tether, I think, owns something like $170 billion in US government debt, right? It's more than most countries. So they're literally creating the demand at home uh because everybody else in the world got spooked with the whole Russia foreign foreign reserve confiscation. Um, but I think you you mentioned that the average sort of man doesn't get he doesn't suffer from this. Maybe not from that dramatic move. But I personally see more of this gradual move where we have slightly elevated inflation for the next 20 or 30 years, and that reduces the real value of the US government debt. And who pays for that? It's basically a tax on anybody with a salary, a tax on anybody who owns some some US dollar cash and lives over. So they they don't feel that they're gonna get poorer immediately, but in the longer term, I think they will be. And I would argue that oddly, the only way out of it is to participate in this uh casino that is the stock market or you know, commodities markets, because there's a likelihood that it'll go up more than the actual inflation. I think a very high likelihood. But if you're sitting on the side because you're scared, and I know a lot of people are, right? A lot of particularly gold and silver investors, a lot of them are like scared to buy it by buy stocks because it's sort of a complex thing and they don't trust it. Um I I would I would encourage people to look at that because I think um, as you are also explained, um the money will seek a return. There's more and more of it, and therefore it'll flow into things that give it a give it a return, and therefore those things are likely to go up in the longer term.

Financial Education Over Financial Products

SPEAKER_00 41:58

It it's perfectly understandable that a lot of people don't understand stocks or precious metals or or whatever, and they're reluctant to go into it, and then they stay in cash. They realize that perhaps they should do something, but when they go to see financial advisors, the financial advisors are on a mission to sell them a product and they feel nervous about the sales pitch and they don't like that, and then they end up doing nothing. Uh, so it is quite understandable. Uh, and by the same token, they could go to an independent financial advisor who's fee-based only, in other words, has nothing to sell. But the problem with that, most people don't like to pay fees. So a lot of people effectively find themselves stuck saying, I'd rather do nothing than because I don't want to pay a fee to anybody, and I don't want to go and see somebody who's trying to sell me something I don't I might not want to buy because all they want to do is sell it to me to make a commission. So a lot of people find themselves stuck. So there's no substitute if you well, so one option is to try and self-educate and buy a simple book like Beginner's Guide to Investment. That's one option. And the the second option is in many cases, your financial institution has products that you haven't heard about, which offer no downside risk or very, very limited downside risk. It might be worth picking up the phone to you, the financial institution where you've got your money and saying, Do you have any risk-free products? Let's see what they say. Quite often they do. These are things which maybe give you the first 10% of the upside in the stock market, uh, but not more, uh, but protect you uh at 100% protection, provided you keep your money there for a year.

SPEAKER_02 43:39

Yeah. And I think I think you're right. A lot of these kind of products exist. I I would probably argue that the the best thing you can do is exactly as you suggest, educate yourself. Because financial education is the the actual path to freedom. And I think the salary people earn is uh is uh is a fund that should be used. It's it's the beginning of a business and the business. Is called investing. And I appreciate most people don't understand it. And we've both been very fortunate to work in the industry for um for a while. So we get exposed to things that you know we get educated by people we work for. But most people are not that lucky, which is one of the reasons we do what we do. We teach people how to invest, and we have a bunch of retired Wall Street bankers and market makers and so on do that. But not everybody's necessarily in that position to do that. So which is why you know hopefully this conversation has been helpful for people.

SPEAKER_00 44:34

When I left school at the age of 18, I didn't know any of the words related to finance that I know today. I couldn't have told you what a tenant is or a lease or a deposit or uh interest or any of those words. I did I probably didn't know any of them. Uh of course I quickly wised up when I had to take my exams, banking, finance exams. But over the years, I was dealing with multi-millionaires as a wealth manager. And uh one of the things I learned is that people are very, very intelligent. They have a lot of money sometimes because they've run a business, but they're quite often very uneasy when it comes to the financial world. They don't really understand how a bond works, they don't understand how an equity works. And if you want to go into the world of things which are more complex, which you know, there's a lot of complex financial products out there, they are completely flummer, you know, they just have no clue. So I spent uh, you know, every uh a lot of my time in meetings with clients explaining in very simple terms products which to the people I was explaining to would otherwise have seemed quite complex. And of course, that that did uh over I mean, by the time by the end of my career, almost every client I had was a hundred percent invested in a basket of diversified things, which meant that they were doing better than staying in cash. Of course, we had our bad years. Uh 2022 would have been a bad year when stocks went down. But provided you were diversified, you didn't suffer the full woes of the stock market.

SPEAKER_02 46:09

You're fine. And I think the the people who are investing in the stock market, I look at thousands of portfolios of like just retail investors, and it's typically uh tech, more tech, and a bit more aggressive tech, uh, which is something hopefully we'll do something about over the coming years to encourage people to diversify. Um and even you know, you buy the SP 500 nowadays, it's a truly diversified, it's like it's largely tech. Right. So there is um there is something to be said to understand this on a slightly deeper level. Um, and I appreciate and I think your viewers very much appreciate the the good work you do and and all the experience and thoughts that you share. And I very much hope you keep doing that. And I've very much enjoyed having you on and and and enjoyed this conversation with you, Clive.

Teaching Kids Money With Little Trot

SPEAKER_00 46:52

Well, before we go, may I just make a quick plug for the Little Trot series of children's books?

SPEAKER_02 46:58

Tell me about those children's books behind you, because I I want to know.

SPEAKER_00 47:01

Um I was going to do a video about the global financial crisis, and for that I needed some pictures, but it ended up turning into a children's book. So book one is called Little Trot Learns to Save Money. Um, but it's introducing to children of all ages the financial vocabulary that I wish I would have had when I was 18. Now, these are not textbooks, they're not they're they're not uh lessons, they're story books with an exciting story, but which but the story contains the kind of words that they will need later in life after they left school, but probably won't get from the curriculum in their school. Uh so the earlier they're prepared, the earlier they'll be able to understand the more complex areas of finance. So these are not books saying they should invest money or they should buy this or buy that, nothing like that. It's just talking about the adventures of a little boy who has adventures which involve finance in various ways. In one of the stories, he hears that there's gold in the hills and he goes off to hunt for gold early to discovery, digs and digs and digs, and doesn't find any. Uh so he has lots of adventures along the way, but there's a very happy ending at the end.

SPEAKER_01 48:15

Very lovely. Do you test these on your son? Is that how you come up with the stories? What's your what's your process?

SPEAKER_00 48:20

Yeah, well, that's right. I mean, he knows far more about finance now. He's nine years old than I knew when I was 18. So I can have a sensible conversation with him about whether he should put his money into gold or Bitcoin or stocks or property, and he understands the difference between each of them. Uh, and and I I can tell you that at the age of 18, I probably could not have told you whether my parents owned their house, whether they rented it, or whether they had a mortgage. I probably didn't know. Um, but I've heard that teenagers are now having read bits of this book are now challenging their parents saying, have you borrowed money from the bank and are you how are you going to repay it?

SPEAKER_02 49:05

And it's a very good thing. I mean, I think one thing I always like to encourage people to do is A, of course, share all your uh financial lessons with your with your children, sort of at least teenage up nine is ambitious, but you know, go for it. It's amazing. And I I I very much like it when families do a sort of a weekly um finance roundup. That's what we do, where we just share where we're at, what's going on, uh, what investments are doing, where they are invested. And I think everybody understands it maybe at a slightly different level, but I think it gets everybody on one path. You actually know where you're going. And I think over time it's something that's tremendously helpful. Um, and if if my parents had done that when I was much younger, it would have been very helpful because I did like you. I I was 18, I made a little bit of money, I lost half of it pretty much instantly because I didn't know what the heck I was doing, and I was, you know, sold some sort of financial product. Um, and it was only later when I landed a job that I figured out how this actually works.

SPEAKER_00 50:03

Most most adults are uncomfortable with the topic of money. They're quite happy to discuss the football or the baseball uh or last night's Netflix series. But when it comes to discussing money, it's not an area which normally comes up uh at the at the dinner table with the children.

SPEAKER_02 50:20

And it's absurd because we we spent we spend you know eight, ten, twelve hours a day of our lives usually working. So why do we do that? For the money.

SPEAKER_00 50:27

Yeah.

SPEAKER_02 50:28

So uh it is it is the most important thing in in in in in our life to give us options.

SPEAKER_00 50:33

Uh I you know, I I I think back to when I was a child and remember my father telling me what a genius he was because he discovered something called higher purchase, where you could buy a TV set and pay for it in monthly instalments. Now that that was to him was the height of being a genius because it didn't cost him up front. But I now realize there was a it must have been a very heavy cost in doing that. If he would have had the knowledge I had, he would have been able to assess whether it was better to take a loan from the bank and buy or do that what's called the higher purchase.

SPEAKER_02 51:07

Yes. Or maybe not buy the bloody thing um and invest the money instead.

SPEAKER_00 51:12

Well, that would have been the best investment of them all.

SPEAKER_02 51:15

Absolutely, yeah. Yes, compounding is the is the this is the true magic. But um I always I kind of I wish that schools would basically replace maths with just five years of compounding until it finally sunk in. And I think people would live very different lives.

SPEAKER_00 51:31

Well, let's face it, when you go to school, you you're studying 12 or 13 subjects, but only three of them are useful. I mean, what are useful for everybody? We've got English reading and writing. Those are the three useful subjects: biology, history, geology, uh uh religion, whatever you study. Those things are useful for some, but not everyone in school. But the fourth subject, which is not generally taught, is money. That would be essential for everybody in school. And unfortunately, schools haven't got there.

SPEAKER_02 52:02

Yeah, and maybe there is a financial incentive there for that not to happen, but it's maybe another conversation we need to get into. Um, too conspiratorial. But Clive, I appreciate your time. Very, very nice talking to you. Um, keep doing exactly what you're doing. And um, where can I get one of those

Where To Get The Free Book

SPEAKER_02 52:19

books of yours? On your website, or where can we find those?

SPEAKER_00 52:22

Um I'm I'm giving away book one, absolutely free of charge, on my website, clive.com. You just have to go there, click click on Little Trot, and download it free of charge. Um or you can go to Amazon and you can get uh the books at Amazon. And they if you want them at Amazon, they're they're you you can buy as many as you want. But the point is they're fantastic gifts for party gifts uh or birthday gifts. Uh, you know, you can't go wrong when you give a child an educational present.

SPEAKER_02 52:54

Especially about money. Brilliant.

SPEAKER_00 52:56

So Amazon is the way to get the paper copy, free copy in PDF format, which you can watch on iPad and my website, CliveThompson.com.

SPEAKER_02 53:04

Brilliant. Thank you very much.

SPEAKER_00 53:06

Bye bye, Felix. Thank you for having me on your show.