Transcription
Hello ladies and gentlemen. It's a great pleasure hosting two of my very very favorite voices on commodities and global macro. Luke Roman and Craig Tindel. Gentlemen, thanks for taking the time.
>> Thank you.
>> Thanks for having us.
Luke, we are very um proud supporters and sub subscribers of of your research. Um we are in touch since 2016 or 2017. We we featured three or four interviews with we with you in the Gold Trust report. So we actually were really closely following how you became a a superstar in in in our scene and it's it's more than welld deserved. And then there's Craig, which is he's kind of the new kid on the block. Uh, and I I told you before we need young and fresh faces. So, Craig, uh, here from Australia. Thank you very much for for taking the time. I think it's it's 10 p.m. over there. Um, you wrote a brilliant white paper called Critical Materials Strategic Analysis and it has gone viral since December. Um, it reportedly reached the White House and the Pentagon. Um, and it sparked conversation about something most people in finance are still not paying attention to, which is the physical world.
So what I would like to do today is bring together the physical side that you've been following for the last couple of decades Craig and then also the monetary and financial side that Luke is brilliantly covering and that we at the Goldby trust report and as well as uh incrementum in our fund management also cover. So I think it's it's going to be really really interesting bringing those perspectives together. Now shall we get started right away?
>> We shall.
>> Sure.
>> Yes, let's do that.
So I mean the big question from my point of view is as we are writing um the 20th in Goldway Trust report and the light motive and the title is back to the future of money. So we're looking back the last 20 years what actually happened and we're also looking into the next couple of years into the next couple of decades. So given all those developments that we're seeing at the moment, you know, the the the the developments around the pro dollar, uh the developments um um uh in the whole Iran crisis, how treasury markets are reacting, how the US dollar is reacting in that crisis. Is this kind of the endgame of the pro dollar and the beginning of we once called pro gold? Who wants to go first?
>> On defer.
>> I think it has the potential to be uh a major change in the global monetary system. Uh someone asked me recently is are they is is the Trump administration trying to end the dollar's reserve status by doing this at least the post 1971 structure of it. And uh I I said look it it's it's a very suboptimal way to go about it but it's a in my opinion but it's it's a highly effective way of doing it. And if that was if that was the goal then okay if it's not the goal then maybe they should rethink what they're doing. Uh but the reason I say that is is ultimately um you're going to be disrupting supply chains in a way that is so great that you're going to force everybody to rerate their priorities. In other words, foreigners, you know, the way the system has obviously worked for the last 50 plus years, say almost 60 years, is we we we hollow out our defense industrial base, send factories overseas, we buy stuff from uh the offshore factories, we send them dollars, they take the dollars, they recycle them back into our financial markets. And for a while, that's a virtuous cycle of trade. And and the result of that is that the United States ends up with not a lot of factories and a lot of financial investment and the rest of the world ends up with a lot of factories and a lot of US dollar denominated assets. And so the second you curtail supply chains as as drastically as you are going to and has arguably already begun by closing down hormuz and now doubly closing it down. Apparently, now we have a a double blockade. Uh you're going to force the world uh to sell dollar assets to buy finite commodities uh wherever they can source them. And importantly, as it relates to the denomination of of those commodities, uh you're going to buy them ideally in your own currency if you can with partners that are willing to sell under those terms and and China has the uh infrastructure for that already completely set up. Um, and so it's really not a very hard switch at all at this point to move to a a pro yuan through gold arrangement. uh the pipes are there. There's already been some volume through there. Certainly the u the you know means motive and opportunity are now all there. So uh I look at it and say all right well is is that the goal? Maybe I it it's a potentially very very messy way of doing it. Uh but I think I I one thing that to me is crystal clear is that we're in a one of these huge moments of history, one of these these these these weeks where decades happen as as uh um as Lenin famously said.
>> Craig, do you want to add something?
>> Well, I I think I think we're getting into some interesting mechanisms. You know, it's no um it's no accident that China ended up refining 50 to 98% of almost every metal, chemical, and gas that you can come across. Um and it's double it's, you know, it it what it's created is that it's bifocated the US dollar because, you know, if you can't if you have if you have to buy it from China, you know, in a lot of cases, you got to pay CNY. um you know and this started out with the iron or miners um 2016 I think FMG started selling in in CNY and and then you had the hold out until you know late last year with BHP and they said they wouldn't accept anything in US dollars and then China put a buyer strike on and you know that BHP changed their mind in three weeks and so with this sulfur situation this helium situation at double It double increases it because you know a lot of the sulfur is used to to refine what we had left over in that 50 to 98% you know including some of the gold miners down the batter they've got you know high sulfur mines where the iron sulfates have to be separated you've got one in Finland you got one in um in New Guinea um and that affects the gold price as well but it goes right through all the metals um you know the copper um is refined in in China using um sulfuric acid and um you know 70% of the world's silver comes from that you know refined that refining process that has copper and lead and zinc involved in it. And so you get to a point where the only shop in town with with inventory as far as the metals go or the gases go or the or the chemistry goes is is going to be is going to be China. and they're going to have a way of I guess a mechanism to to break the dollar if they want um you know with with respect to commodities and then all you've got um from a USD perspective is the you know the predominant debt I think it's about 50% of the world's debt is denominated in USD um and if something should happen to the global economy um and there's a downturn um you know these deep financial markets um can't buy anything. Um and so you end up with, you know, all these uh castles in the sky, these clouds in the sky, which is, you know, the the electrification that we're going to build, um the green electrification, you know, for for for Europe and all that. And then you've got um you know, the AI data centers that, you know, are already being called off. Um and so you've got I guess a a break in in the growth of a lot of the headline um ideas in the market at the moment. I think uh the MAG 7 is is something like 40 50% of the market. I haven't looked lately, but um you know that's a big part of the market and if you get Nvidia and you get AMD can't find can't put their inventory into data centers because they can't get the copper because they can't get the the silver because they can't get the so on and so on. um you've got situation where you know the it could get fairly hectic and I you know I I'm on record saying this is why you know Trump went into Venezuela and and he's looking at Iran now I think they're over a barrel um they've already been told on a number of occasions um through license agreements I've read all those licensing agreements that you know they may take cut off silver or gallium or or or whatever they want depending on whether they approved the purchase of the purchase um and that's intolerable for the US um you know because gallium is one of the main new um rare earths who put into a lot of these energy weapons these microwave energy weapons that make the drones drop from the sky and the and you know in Venezuela it made all the people fall down um so their troops could go in um and so you end up with a situation where you know the the US has to do something um or give up or give up defending itself or be heavily compromised or you know withdraw to the US because they can't rearm. And so I think that's what a lot of this trouble is about. I don't you know Trump people are asking has Trump got a strategy? I you know he's got a lot of good people behind him. I don't know if they're doing the right thing, but um he he's got some strategists behind him and you know I think he's forced his hand. I think he's got the incentives in place that you know if he get puts up he gets put over a barrel you know at the end of the year or something like that with cop suppliers and nobody can build their AI data centers and things like that. you know, all these um theoretical discussions about who's leading the AI race will disappear because the Chinese will have the copper and the and the rare earth and and and the US won't. And so it's a tortoise and hair thing. The the hair runs out of puff and the tortoise runs past.
>> Now, Craig, um that that that brings me to my my next question. I mean the the obvious thing is that most most people currently um they they focus on on on on oil prices perhaps on on on net gas prices LNG but from your point of view as um the the Straits of Hormos is now now closed again um uh twice by the Iranians and the Americans. From from your point of view, um what else is going to break uh even if the strait should be um opened um uh right away soon again? Um, where do you see like the second and third order effects and and and in in in what which kind of markets do you think um are the effects that dramatic that it's going to take um a long time to actually um uh uh repair those those those issues?
>> Well, I I think it's right across a lot of things. I think you could open straight tomorrow and still have, you know, downstream effects. If you look at some of the the poorer countries, Nigeria, um, uh, Bangladesh, um, you know, parts of India, you know, they they they haven't got any LG and they haven't got any sulfuric acid and they haven't got any of the inputs they need to make the fertilizer. Bangladesh fertilizer factories are working at 20% or something like that. Um, and then you get into planting seasons and timings and things like that. So, you can open it up, but they didn't have the fertilizer to plant their crops. That's you can't change the weather or the seasons. Um, so you end up with a and you know, we've heard about the the aluminium um smelter that's uh that's I think in Iran and there's one in Saudi as well. Um, you've you've got a whole bunch of stuff that just doesn't start up again. And that's been one of my main themes I've been talking about. You you know the the economists look at everything you just push a button and start it again. The reality is if a if an aluminium smelter shuts down, it takes you 12 months to start it up. You literally have to get jackhammers to to to reopen it. Um, you know, and same same with some of the, you know, w with all of them really. And we're not moving at scale. There's lots of things being done in the rare earth um situation to to to open up American rare earth capabilities and Australian rare earth capabilities, but they're not in that time frame. They'll take years. So, you got this gap in the middle and I don't know what's going to happen in that gap in the middle. And that's what I think we'd all admit to. You know, we you make too many predictions. I put out a post yesterday and said, you know, stop making predictions everyone because it's it anything could happen. Um, literally, you know, we don't know what there's there's a three or 4 D game of chess. So, I don't know whether they're good three or 4 D chess players. Um, but there's a three or 4 D game of chess happening, but you know, outside our hierarchy of intelligence, you know, that we just don't know what's going on and, you know, we don't know what surprises they're going to bring up. Um, but they're going to be, you know, they're going to be super interesting for the markets.
>> Luke, would you have expected that much complacency from from investors when it comes to, you know, uh, the reaction to the to the whole crisis? I mean uh uh the straits is uh is is we're this war is now going on for what is it uh one and a half months basically. Um and the S&P is just two or 300 points below all-time highs. While the Dixie has reacted, yes, but not not really as the classical um safe haven as it usually does. um gold was was initially sold down um as it also usually does in terms of um um funding stress and and and and and liquidity being needed. But but if I would have told you like in February that uh we'll have that kind of a crisis, would you have expected the S&P trading close to to all-time highs or or and and of course I mean what does it mean? Is is are financial markets are there just you know uh conditioned like Pavlovian dogs that you know there will be another taco and then everything will be fine again. um or is it basically, you know, uh just a another great opportunity on the short side?
>> You know, I would I would have thought I've been surprised at the duration of the complacency, but I think some of that is around which it is I think some of that is around um all of what you said as well as um I don't think people understand what's what's actually happening on the ground still yet. Um, and perfect example, I I gave a I had a a prospect um call with a a institutional potential client um about six days after the war started. And I said, "Listen, based on what I'm hearing on the ground, this is going to go way longer." And I would start positioning, you know, I would at least start. I said, "I think this is at least going through midappril, end of April, which means we're going to have problems. But I would also begin positioning your portfolio or at least start thinking about it for what happens if the Street of Hormuz is still closed at the end of June, Fourth of July. And it looked like when I said that, the person's face basically dropped. It was like I had like, you know, climbed through the screen, kicked over their coffee all over them. And and they said, "Well, that can't happen. you understand that you're saying basically a billion people are going to starve. I said I understand exactly what I'm saying and I'm just telling you that this is what I'm hearing mar on the ground married with everything that Craig laid out which is this is not something you know the physics of this the supply chains of this uh are not what not what can be re re brought back up quickly. So, I think there's still this sort of he's going to taco and it's all going to be fine. Um, I, you know, we've had a couple of indications in the last week and a half of what I had been hearing to that point, which was the Iranian weapons were performing much better than expected. The US defensive missiles were performing much worse than expected. Um, and the maybe the biggest thing that people are mispricing as to why this is is Iran is existential for the United States for the reasons Craig laid out. It's existential for Iran for obvious reasons. It's existential for Israel. It's existential for Russia for ge uh geo um strategic reasons. And it's existential for China for supply reasons. And and and when you put all of these every almost every analysis I see as it relates to when is the strait going to reopen and when is this going to normalize is these analyses are well America plus Israel is so much greater than Iran this shall be over soon and that ignores that Russia and China see this as um as as existential that ignores that Russia and China have been helping since very shortly after this started with targeting and supplying. Uh, and this ignores history. I mean, this is a 2,000-y old culture that that is full of engineers that has had 40 years to prepare and that generally speaking, it's it's kind of like Afghanistan, right? They call Afghanistan the the graveyard of empires. And, you know, the Americans went and said, "Oh, it won't apply to us." It's kind of like, "Well, okay. Well, we we spent 20 years there and got a bunch of people killed and spent a bunch of money and we accomplished very little. Um, and once again, we're we're sort of falling prey to the same hubris, which is, well, you know, it's always been a bad idea to invade Persia, but, you know, we're different. We're America. It's like, okay, here, you know, I guess we're going to have to find this out. So, uh, when I look at all of those things and then I layer on what I think Craig has the best understanding, uh, um, of arguably anybody in the world on this around the what I've called sort of for want of a nail dynamics, right? There's the famous poem of for want of a nail, the cart was lost. For want of the, you know, wheel, you know, so on so and so ultimately for want of a nail, the kingdom was lost. these supply chain dynamics when you overlay them with the great power dynamics and the macro and and then of course we're on the clock. We're not doing this with record low levels of debt. We're not doing this with record low levels of of of supply chain complexity. We're not any it to me the the complacency is astonishing remains astonishing and I think we are running towards a what I've called a a Tom Hanks COVID moment right where we we sort of all knew in January was like okay well something's happening in February is this a flu or is this you know is this real and then in short order we had Tom Hanks say oh I've got COVID and I hope I live and then we locked everything down and markets just went h and I think that's what we're heading toward in coming weeks, days, and I don't know what the trigger is going to be. Uh it could be anything. I mean, when you start seeing protests in Ireland around fuel, etc., these are these kind of things are going to start breaking out everywhere. Um and I just I think you know, one of them markets going to realize, oh my gosh, things are much more broken than I thought in the physical world. and this equity, you know, this claim to that physical world that I hold as an investment isn't worth what I thought it is. And it it can't it mathematically cannot be. And so that's that's how I'm thinking about it.
>> Well, um you made a a brilliant um uh thought. You laid it out in in one of your previous writings. You said the US government is trying to stop free markets from appropriately pricing the Iran war while maintaining the illusion of free markets and hoping the war will be over before physical reality makes this obvious to investors. I thought that was really, you know, that's that's all one has to to to to know like in in in one sentence. Um, so, so this illusion of free markets, do you think that Donald Trump is actually, I mean, uh, I'm not talking about, um, people making shitloads of money, um, from from inside informations, but do you think that, um, Donald Trump is following capital markets more closely than when it comes to, you know, um, um, um, the war? Does he follow it more closely than previous presidents?
>> I think I don't know about the stock market. I mean he said look I can I'm willing to let the stock market go down. I think there's a limit to how far stocks can fall. Um in his mind that it hasn't been breached yet. Um but I think he's watching the the Treasury market very very closely and and if he's not Bessant is and we can see that from I guess it was two weeks ago maybe three weeks ago we had uh three three breaches in one week of the 10-year US 10year Treasury yield of 4.4%. Sunday night when he threatened to to sort of bomb Iran, all of their infrastructure. This was March 22nd or 23rd. Um, breaks 4.4 on the upside, he tacos. Then on Tuesday, it breaks it again on the upside. We have Netanyahu come out and say something. Then it breaks it again on Thursday on the upside. He comes out and says something else. I forget what it was. And during that week, we also had three really, really bad auctions. Uh, maybe that was the next week. I guess we had a bad two-year, bad fiveyear, and bad seven-year. Um, but the bad two-year auction was really surprising because there there should never be any demand problems for a two-year Treasur US Treasury auction, and it was a really bad auction. So, uh, I think that's the market they are very focused on, the Treasury market. And I think, you know, last week or a week and a half ago, we saw the single biggest Treasury buyback ever done by the US Treasury, $15 billion in one day. Uh, and I think it's all part and parcel to they can keep the Treasury market quote unquote functioning. Then they can they can, you know, they can override the bond market's veto on everything they're doing for a bit longer. Uh, because ultimately the bond market can't veto the day that, hey, the rare earths aren't there, the the the copper's not there, the aluminum's not there, whatever. That's that's the day we're rapidly running towards. In the short run, um they I in my opinion are very focused on managing uh optics primarily in the treasury market.
>> Craig, um what what fascinates me about uh your work is is is you know you're talking about um let's put it that way. Everybody in finance is is is talking about price, but but you actually talk about, you know, um if the stuff actually exists, if it can be delivered on time, who controls it, who's refining it? And I think this is something that this um I think you once called it the end of infinite materiality. Um, and why this matters now is something that is for what I call spreadsheet people. You know, people in finance only uh uh focusing on the Excel sheets. It is something that they don't have any clue about and uh you know I've I've I've made so many mine visits throughout my career and and I actually know how it feels to be at the mine site and to talk to the to mining engineers to the workers there. It's it's something fascinating and and and you know you can you can you can buy a mining stock but then actually if you want to really get a feeling for it you have to visit a mining project. So do do you think that you know this this is there I mean at least some more understanding of all those um of all those shortfalls that we're seeing in the physical world in the refinery world and and you know who actually controls um the access to to to commodities. Do do you see like a big shift or is it still for your understanding um, you know are politicians and also companies way behind the curve?
>> I think they need to move fast enough. I talked to chairman CEO level of a lot of these new refining partners let's call them in various rare earth titanium right across copper all that kind of stuff. So I I get a good I get I I get a lot of feedback. Um we're not moving fast enough, you know, like if we just go back to the data centers. Um we need to u we need to open a a a major mine. Um we just need to open six of them a year and we're opening one of them if we're lucky, one and a half of them if we're lucky, when we haven't got enough copper. You know, if you just kind of drill it down to, you know, one thing, we haven't got enough copper to build this electrification. It takes you five years to get one of uh Seaman's um transformers onto onto site from ordering it and it'll be out at six and seven years. Their SEC filing the other day said 143 billion euros in back orders. Um, you know, Hitashi is the same. Itachi is opening a factory in um the US. Um, you I think seas are opening a factory in the US too. But these things take time and so the scale that you know I think there's inside the administration they're well aware they're caught in the trap. Um, you know, I don't I don't think there's any doubt about that. But it takes a while to get the the Queen Mary moving so to speak and and and it's going to take a lot longer than they can do. And this is why I think the heat is gone on because they've got the incentives to to offset those shortages. They've got their pants down. They need know they need time to fix it. And you know, this this Iran thing is a way of I guess choking energy in a hopefully a way that slows down the I guess motivations of the Chinese to to cut off the the Americans and the Japanese from from rare earth and and copper and all the things they need. But there's a there's a mismatch, isn't there? You talked about it, Luke, and you know there and you talked about it. We've got we've got a situation where everything's overvalued. Like if you look at the Nvidia filings for the next um I think it's the the Rivken or the I forget the Ultra the three new releases of chips, right? And I've looked at the design of them and their use of rare earths and copper um extrapolates exponentially. You know they but in 2028 um Nvidia is using something like 250,000 tons of copper a year. You know that's that's that's a lot of tonnage when they're using 30,000 40,000 tons. Now how do they extrapolate that? There's already inventory sitting, chip inventory sitting outside data centers that can't get electrified at the moment. And how are they going to electrify it? They can't get the transformers. They can't get the boilers. They can't get the gas turbines. They can't this, you know, everything's been bought up. You if you you listen to Elon, you know, he he had to get that gas turbines and stack them. And then he had to use diesel as well to get his his one up. Now, we only need a few of them to do that. And what are they going to come up with after that? You know, they they're out of they're out of plans now. It takes you five years to get a gas turbine. So, we're I I think we're in our WY Coyote moment. We're out over the cliff and we're just you know you happened in um it happened in co too. I remember shorting the market and I went backwards in the LA for a very large amount of money and um and and two weeks what later the the market the floor dropped out when everyone realized that it it's it's looking silly and I had the same experience as you Luke I I I um talked to all the fund managers in a very large fund with trillions under management and I I did a present you know 45 minute presentation 45 minute question answer to them and they were just kind of not they didn't know what to say because they hadn't come up that none I don't think anyone was expecting this kind of shock you no one's ever looked if if somebody says they're going to make data centers and replace all human work um you know with AI and it's going to you know Dario comes out and says you know we're going to replace all accountants and everything like that I think we just take them at that word that's our culture at the moment and so it It's another measure of their disconnection from the world because they're building these data centers in the sky just by design. Um, but they haven't got the bill of materials and they haven't got the bill of materials not just for one thing. It's not got copper shortage. It's you 23 different elements and then you haven't got the infrastructure. I wrote a a paper called shockpoint and I looked at 24 industrial actions. I looked I looked at fires and explosions and all those kind of things because I was to be honest I was I was kind of suspicious because everything was blowing up and so I looked at all the reports that went into those fires and explosions because what the US does do a good job is investigate them and it was all accident. It was all accidental. It was it was what happened and the the core of it didn't start with Trump. It it came from um Biden. he started loading up this infrastructure with, you know, all of his his green ideas and the green infrastructure and the transformers and that started to load up the electrical and industrial infrastructure that hadn't built anything for decades. And and so when we loaded that brittle infrastructure with Biden's um um budgets initially and then Trump's um it just got too heavy. You know, we haven't got the skills. You know, most of the industrial accidents happened by accident. They were actually accidents that people turned on a plug or pulled out a valve or did something silly and it caused a multi-million dollar explosion. And some of some of Biden's projects are really interesting. You know, a company would put a a new green gas plant in and it cost them $200 million to build and then blow up and they say, "Oh, okay. We're not going to do that again." They they're off. you know, might have put a cloud of lead or or something over the over the whole county or the village or the town or wherever it was, but they just gave up. They just said that was too hard. We're not going to do that again. We've lost $200 million. We're going to do it the old way. And so, you've got this stop start thing, you know, a lot of us think of it as ideology and things like that, but it's it's it's there's a reality to it all. You can't just keep putting demands because there's a budget allocation, putting demands on infrastructure that's never been used for decades and decades and decades and all of a sudden it starts breaking and it's just common sense. like that magnesium plant in in Utah, you know, that US magnesium went broke and so the the state of Utah bought the magnesium plant and retired it, you know, and now you have any magnesium to make titanium. Um, so it's it's it's it's going to take the US 10 years to fix. Um, and that they haven't got 10 years, so they're going to do something else to to balance the the issues. And you know that that that's what concerns me is that something else could take the form of a war. Um but does the US have a choice? I'm not sure. I don't you know do does it become a vassal state of China or does it or does it try and and, you know, get the space it needs for the you know, three, five or 10 years it needs to re-industrialize. um, you know, it's it's happening at the greatest demographic retirement rate ever known in the history of of America at the same time. So you haven't got the skills either. The skills and we're doing it in Australia and it's happening in Canada. Like we had a lithium plant closed down the other day. 355 employees. They're all gone, you know, somewhere else. And now we don't refine lithium. And all the offtake agreements are going to China to get it refined anyway. So you know, what are we really going to do? Are we going to retire those off take agreements that China's, you know, locked up with contracts and things like that? Like if you go round each mine, this is where I got onto it originally. I kept thinking all of these offtakes agreements, they're all going to China. um you know, all of the you know, if you look at somebody like Pilra Metals um you know, they they're they're one of the biggest lithium miners in Australia and 85% of their their offtake goes to goes to China um so how exactly are we going to take control of all this if we keep closing things down there was another I think Glenor was trying to build a copper refiner in um in in Canada and the ESG requirements were just too hard and Glen Coror said, "No, it's too hard. We're not going to do it." And so we keep failing as much as we're succeeding. It's, you know, two steps forward, one step back, then three steps forward, then two steps back. It's confusing. Um, and so I think this is what Iran's about. I think what's Venezuela about and you know, I to some extent I hope the Americans are are successful because if they if they achieve some kind of balance without causing a major war um, you know, maybe they can put it off because I don't think any anything good comes from the domination by one party the other, you know, it just creates incentives to do things that we don't want to really know about.
>> Now, thanks for that, Craig. You mentioned the the reshoring the the industrial base in the US, and I think this is also something that um Luke talked about um very very very frequently. There was this this great paper by by Steven Miran um when he was still at at Hudson Bay. It was called a users's guide to restructuring the global trading system. I mean it was basically you know the the the playbook for the Trump administration to first of all um create this this renaissance of US manufacturing but then on the other hand and I thought that was really the interesting thing um how to defend the status of the US dollar as the world reserve currency. Now obviously the US needs a weaker dollar and and against the euro which is uh you know for especially for German um industrial companies it's already becoming even more of a um uh of an issue because euro dollar is trading now at what is it 116. Um Luke, what what do you think you know this the fact that last year dur during liberation day when we saw like a tiny spike in the US dollar but then actually it sold off and now again during that crisis during the Iran crisis um everybody would have expected based on the old playbook that the US dollar would spike but it hasn't. Do you think that's kind of a a confirmation of our thesis of a of a weaker dollar? um or or at at the end of the day um every politician actually wants perhaps except for the Swiss um but every politician wants a weaker weaker currency and then the question is against what do you devalue and probably against hard assets like gold for example but do you think it's really will the US achieve dramatically devaluing the US dollar by dramatically I mean like I don't know 20 25 30% because if we compare the current let's call it weakness to previous big bare markets in the US dollar we haven't seen anything yet.
>> Yeah, it's been remarkably steady both directions to your point. Uh, yeah, I would have guessed it would have strengthened more in the Iran situation than it has. And maybe that's also just a function of what we touched on before, which is nobody believes it's about to get as bad as as it is. Um, I also think the strength of gold has something to do with this, which is I I we've we can see that gold has on the margin replaced US treasuries as the primary reserve asset. Global central banks stopped reserving treasuries 12 years ago um and and have been buying gold ever since. and so much so that gold now exceeds treasuries and global reserves for the first time in 30 or 35 years. Uh as I look at what is being done particularly by China, Russia, um certain other central banks by this move and then as I look at the ne the the conversation the negotiation that's been happening between the US and China for back to the Biden administration at least I think starting you know every time starting 2023 2024 before when the US administration would sit down with China and say you need to you need to strengthen the yuan. I think China's been saying, look, problem isn't the yuan. The problem is that you guys have overvalued the dollar versus gold so laughably that if you want the dollar to fall, you need to let gold rise. And we've seen Bessant do that in particular, right? The gold has, you know, broken over 2,000 for the, you know, finally sustainably and and ran up to 5,500 or whatever it was. Um, people say, "Look, China needs to let trade, you know, chi China is is overproducing. China is well, they're more productive than everybody else." And absolutely, they're also um inh subsidizing their industry. So is America. We're just subsidizing for stupid wars in the Middle East rather than subsidizing an industrial base. Um, now we're going to try to subsidize an industrial base with all the challenges that that Craig has highlighted. But if you look at China's, you know, for example, record trade surplus in 2024, $990 billion, uh, and then you net that against their gold imports, if gold was $22,000 an ounce, China would have run a balanced a balanced um book of trade. uh the I think the math on China's 2025 trade surplus also a record despite the fact that the dollar fell meaningfully against the yuan in 2025 um and I think it was $1.2 2 trillion and I want to say it was $26,000 per ounce. Uh China's gold imports would have balanced trade. And so I think some of what we're watching with this dollar action not rising as much as we would have thought in a war, not falling as much is essentially some of the increasing influence of gold in relative valuations between the yuan, the dollar, and the euro. And the euro of course is the big crosscurrency pair against the dollar. And so to the extent gold gold goes up that's all all else equal good for the euro bad for the dollar. And so I think it has been you know it's I don't think it's the the primary driver but I think it's been an influencer the fact that gold has has that the dollar has weakened so much against gold over the last year and a half. So you know I've I've been surprised on some level that the dollar hasn't moved more. Um, but I think I think gold has somewhat of a role in that. And I think that continues to be China's point, which is look, if you want to balance trade, let gold go. Let the gold is ultimately the arbiter of of balance. It has been for 5,000 years. And, you know, the American financial types want to pretend like that's not true over the last 50, but it's been true for 5,000 years. And and I think the Chinese are just saying, "Look, let gold go and and trade will balance. you'll be competitive with gold at $20,000 an ounce. Now, that has some very, you know, probably some very draconian implications for the value of the dollar on the downside, but that's what we want anyway. Well, you know, we need a weaker dollar to reshore. So, you know, let's see.
>> I mean, that's that's for me the the really big question when when people say, you know, is is gold too expensive now? And I say against what? uh against oil it was super expensive or let's say oil was was was way too cheap uh before the before the crisis is still cheap against most commodities gold is expensive but the big question is are we in the middle of a remonetization of gold. So if there's a a monetary revaluation, if you measure it against that, if you measure it against uh various monetary aggregates, M0, M2, whatever, gold is still kind of dirt cheap. So that's that's really the question. And and and you know, the the shadow gold price, if we just back like 25% of the monetary base in the US, we end up at 8,000 bucks. Yeah. um if we go to to 100% what what sounds like quite a lot but we had it actually in 1980 and in the 1940s we we end up exactly where you said above 20,000 so so I think that's that's really the big question the legendary uh blogger uh fo friend of a friend of another you know this is kind of a mysterious blogger um and he said in an interview that we did with him you only need um one revaluation of gold in your lifetime and I think you know it it actually happens kind of in in every generation. So, so if we are in a like a really a monetary cycle for gold um then I think we're we're not you know it's gold is not contrarium but then on the other hand having a look at family office allocations for for example it's.9%. Goldman had a a study recently with um institutional clients 17 allocated to gold ETFs. Um UBS had that study where they asked family offices in Europe I think gold and precious metals in general was like 2%. So I think it's it's that that that's really the the big big question for for us going forward.
>> Now, Craig, one one question for you, and this is a kind of a thought that I that I had had recently when I went for a for a long walk. I said, 'Well, 2022 was obviously um a very very important um um time when you know the Western world um sanctioned um Russia and basically froze 300 billion of um of of Russian assets and consequence was obviously that um central banks from emerging markets went on a buying spree spree and bought I think three years in a row more than thousand tons of sold last year 860 which is in value terms um it was an absolute all-time high. What what would you say could we see this um kind of those sanctions those financial sanctions that the western world basically did with Russia and threatened you know other emerging markets as well. Could that kind of reverse? And we're already kind of seeing that with emerging markets basically saying, "Well, France, we've got the stuff. We've got the commodities, so you guys better behave."
>> Yeah. Well, I think I I'd have to check, but I think China produces about 500 ton of gold. Most of it goes to Hong Kong and places like that. um about 30% of that they refine u they're refining ore from from other parties from Australia, from Peru, from Chile, from um wherever it comes from. So, you know, they've got to lock up on gold as well as silver as well as everything else. And if you want to talk about sanctions, um that's a material sanction against a financial se sanction. Um, we locked up the Russian billions, you know, 300 billion or whatever it was, and they could, the Chinese could easily lock up everything we need, including the gold. And that creates a shortage in the Western markets. You know, the silver is a is is a good one. Um, we're 5,000 tons in deficit per year or something like that. Um, 25,000 tons over the last five years in in deficit. Um, now 70%
Of it comes from China. If China doesn't send it to us, we, we, we, we go to about 13,000 tons in deficit, right? And so the price, the amount of silver that's available in the western markets goes down because they're keeping it all to themselves, and that has to come out of vaults and cut drawers and places like that. And so that puts a lot of pricing pressure on, on, on, on the western markets. And so you could have a b, you know, they could bifurcate between the Chinese market and the western markets.
And you look at, you know, the Chicago Metal Exchange, London Metal Exchange, owned by the Chinese. Anyway, um, you look at the Shanghai, um, you know, they've got different rules. I went right into their rules as far as, you know, their auction rules, and you, you, if you buy, if you buy gold or any metal on, on Shanghai, you got to, you got to put down a high premium, and then you got to make payments towards delivery. And, you know, naturally, they've built an exchange to deliver metal, and we built exchanges to, you know, speculate. And so our speculating exchanges don't have suppliers of metals like the Chinese ones do because they've got all the refiners.
So you've got this explosive situation across all of the metals. And, you know, you're right about the one or 2%. Um, you know, there's about a $400 trillion capital market from all investments, um, in, you know, across the world, and about 2% of it's in mining or 3% of it's in mining. Like, it's there has to be a rotation, a rotation from hell that takes the money out of these speculative ideas of building, you know, massive AI data centers that they can't build anyway. And, and, and it all has to, a luminary said to me the other day, it's like Niagara Falls going through the eye of the eye of a needle. Um, you know, the realization when this market realizes that they haven't got enough stuff to do any of the stuff they need, maybe not even enough stuff to create the fertilizers for the crops to eat. Um, you know, that's going to reorganize the market very much.
And I, I just feel like, you know, when the market in CO kept going and going and going, and we thought, what, what the hell is going on here? The airlines are closing down, but the airline stocks are going up. You know, the, the, the ocean liners are being, you know, shut down, and the ocean liner stocks were going up. And then all of a sudden, all hell broke loose, and everyone had a realization together, and everyone ran, ran for the exits. And so, yeah, I, I think gold at $25,000, you know, at some point, it's not hard to imagine that in order to save the USD, they have to anchor it on some kind of commodity mix, anyway, whether it be gold or silver or or a whole bunch of it. You know, if you look at that $12 billion fund, I, um, the reserve that they were putting together, it's not hard to imagine that being a, you know, an I guess a real money asset. Um, and also, you know, it's not hard. Rubio said, I think the other day, it was less than two weeks ago, you know, in five years, not everyone's going to be using the USD. Like it was, it was almost like an own goal that they can see it's going to happen as well, and they're going to have to prepare plans to, to, to reconstitute it. And then you get this fabled thing that we all thought might happen, but we never really believed it. Gold has to be revalued, um, significantly higher. You know, I've been, I've been in this market for 40 years, and I've always heard that story, and I, I started to believe it wasn't going to happen. And like, um, you know, the last 12 months, I think, well, yeah, there's a, there's a great chance it does happen, especially if one of the others does it first, then they, then there's no choice. Um, so we're at this, we're at this, you know, it's, it's almost pinch yourself to be alive type moment. You know, I hope it all works out not too badly, but, um, you're in this kind of moment where something has to give, and we're not sure what's going to give. Um, but we know the, you know, we know the reality. Like the FOMC framework basically selected for this. You know, if you look at all the, the Euler's theorem and the, the Triffin's dilemma and all the, all the theories that the FOMC uses to guide them on monetary policy, you know, they're basically being pricing the whole economy on a bunch of, um, you know, consumable CPI goods, um, and and not, and they, none of their theories, and I can prove this, none of their theories notice their industrial base falling apart. And the reason they didn't notice it is because the largest of having the reserve currency, it, it, it obscured the reality of the economy. It made it look better than it was. And so, you know, they've all woken up and gone, "Oh my god, you know, that this, this reality is we haven't got an economy." Now, how that implodes is anyone's guess because, you know, one of the things I say a lot is, let's, let's stop pretending we know what's going to happen. We know the conditions. We know the conditions precedent. We know that something's going to happen, and we know it's big. But how it, how it unfolds is policy path dependent on, you know, what, what Trump does next, whether it's a taco or whether it's something real. Um, and it also depends on what the Chinese do. They've been thinking about this a long time. Um, and, you know, they, you know, they've got countermoves on our countermoves, and, you know, we've got countermoves on their countermoves. How it all ends up, um, could be really, really ugly. But a gold revaluation, um, you'd have to put it, it's probably the most probable it's been in the last 40 years since I started investing. And, and, and I think something like that has to happen. Like, how does it, how does the US dollar anchor itself? Is it going to anchor itself on the world's debt? If it can't buy commodities, if it can't buy the things that China provides, how's it going to anchor itself? I don't know how it anchors itself. Um, you know, there's going to be demand for it because people are going to have to buy dollars to, to, to pay bonds. But, you know, is that enough? Um, you know, and, and does it, can they re-industrialize on that basis? I, I question that.
Well, I mean, we, we've got, uh, another interview with, with Dr. Trudy Shelton for this in Gold Trust Report, where we're talking about gold-backed, um, 50 or even, even 100-year, uh, uh, treasury bonds. And I thought, that's, that's, that's really interesting. And a couple of years ago, I would have thought, okay, that's, you know, that's science fiction. But, but I think those things, and like Scott Bessent talking about gold, talking about the revaluation of gold, also talking about Bitcoin a bit, the, the strategic Bitcoin reserve, which hasn't been really discussed recently, which is pretty interesting. But all those things kind of telling me that gold is, is, is, is definitely now on the center stage, while it was playing like, you know, somewhere like on a very, very small stage, uh, uh, previously. Now, Luke, one question for you, because, um, usually the reaction function to a crisis is, yeah, well, you know, the Federal Reserve will will take care of that. But now this is like a stagflationary environment that we're facing. So, inflation expectations, so far, they are still somewhat anchored. Of course, we can discuss, uh, all those, um, uh, CPI calculations and so on. Just, just one thing, I'm, I'm, uh, I'll take the family to to Rome at Naples, um, in in autumn, and and I talked to to a guy and said, yeah, well, um, um, can you look into that? And he said, "Well, actually, your kids, um, they, they changed the rules. They're not kids anymore." So, previously, you had to pay like for adults starting when the kids are like 14. Now, you pay for adults when they're 11. So, I said, well, this is actually, this is inflation because you're actually paying much, much more for for the same thing. Um, but anyways, uh, we all know that inflation is significantly higher than it's officially reported. Uh, and we also know that, um, what's going on at the moment isn't, um, let's say, a positive, uh, push for for for the economy. So, we are facing, facing stagflation, which is a tough, tough environment for for central bankers. And, um, based on the, uh, mainstream textbooks, stagflation would be impossible, but we've obviously seen it in the 1970s. And we know that gold, and also commodities, and also small cap stocks, uh, actually performed the best, um, during that stagflationary environment.
Now, Luke, you, you talked about, I love that term, um, the whoosh down. Um, so that's the volatile period between a market correction and the eventual intervention by the Fed or the Treasury. Um, you are now officially, um, positioned over 50% in cash. What kind of, um, intervention could we see by the Fed or the Treasury? Will it be another round of QE? Will they say inflation is only transitory and they will will lower rates? Will it be some sort of a yield curve control, or is it going to be something completely new?
>> Yeah, it's, you know, over 50% cash and bullion, gold bullion is the position. Um, they're in some, they're in some, they're in a pickle. They're going to have this, you know, stagflation is ultimately just an emerging market currency crisis in a developed market. That's all it really is, right? You've got a weakening economy and accelerating inflation because your currency is devaluing. Um, and that's what they're faced with. They face a choice of, you know, either, you know, print the money or or otherwise inject liquidity into a, you know, into a, um, commodity price spike to contain the bond market, to keep nominal bond yields affordable to the central government, to the federal government. Uh, or they stand aside and and they let bond yields, uh, curtail the domestic economy. And the problem is, is we're starting this war from a standpoint of US entitlements plus US interest expense at over 100% of receipts, and receipts are basically all-time highs. And so if you have any kind of recession in the US, you are mathematically certain to go into a debt spiral where your rates are going to go up and your receipts are going to go down and and wash, rinse, repeat. Uh, and the, and the West will go right alongside with them. Uh, or you're in a situation where you back out and and you let markets dictate to your military, hey, we can't afford not only this war, but we can't afford our, you know, whatever it is, you know, 700 bases, what have you around around the world in 100 odd countries, and we're going to pull these in and we're going to kind of concede to just focusing on our hemisphere of the world. And I, that doesn't look like that's going to happen either. So the central bankers are, are arguably, you know, the, I don't know if they are cynics or realists, but it's part of the point of a central bank, these people would argue, and I, I kind of agree with them, is to finance wars. And here we have a war. And so to me, I think ultimately, you know, I was actually just remarked to my wife last night, we're supposed to be coming up on the end of the Fed's RMP, reserve management purchases, any day now, right? It was basically just a stop gap to get us to to tax receipt season, and in theory, the Fed's going to be rolling these off in the next couple of weeks. Well, will they? I think that might be our first sign of what they're going to do. And, you know, my bet is they'll probably continue them due to the war. We have to keep these in place. We don't want to create. And that's your first, and that I think will be an important moment of the next step in terms of what central banks are likely going to be forced to do and how they're going to react, which is inject liquidity into a commodity spike.
>> Yeah. Which, which is, I mean, they they will probably come up with, uh, reasons for that, and inflation is going to be transitory, and whatever. But we all know that, um, you know, midterm elections are coming closer and closer, and obviously Donald Trump is is getting more, more nervous now. Craig, you being from, from Australia, Luke being from, from the US, and I'm based here in Europe, I can tell you that obviously, uh, Australia is is resource, uh, rich. And the US, one of the biggest takeaways, uh, from, from my, uh, conferences in, in Colorado, Precious Metal Summit and Denver Gold, was that so many companies, US companies, Canadian companies, but especially South American companies, they said, "Well, um, we're actively being approached by US government representatives regarding, um, offtake agreements, financings." There's one company that we're investing in, invested in, um, Sierra de Asco Resources, down in, in Peru, which is a, a huge, huge tailings project with lots of silver, but especially gallium. They just got a big financing by the, by the US. So it seems that that the US, uh, realize that they need reliable and and and and, um, good access to, to, to resources, while Europe, I'm not so sure about that. Um, so from a relative point of view, where would you see Australia, but then especially Asia, Europe, and and the US when it comes to this, this race for access to commodities?
>> Um, I think we've just, I think what we're doing is, we're, you know, there's a lot of activity between the US government and the Australian government to secure resources and rare earths and and things like that. The same thing's happening over here. Um, you know, there was another $3.6 billion agreement signed the other day. Um, so I think, I think the US government's on its skates and skating as hard as it can. Um, you know, we haven't really seen the reality of those, those hit as far as, you know, shovels in the ground and and all those kind of things. Um, you know, there's a big scandium mine that, uh, Robert Friedland's opening in in in Queensland. There's, you know, there's a, there's a tin mine in Tasmania. There's a, there's a, there's a whole bunch of activity happening, but like I said, it, and I think Luke said, you know, quite openly, it's going to take a long time to get this stuff going, even if everybody goes as fast as they can. So, um, you know, we're seeing that, but I'm also seeing a lot of, you know, supply side inflation. Um, you know, there's a lot of these junior miners, and and, you know, they're going to have to pay higher for diesel. They're going to have to pay higher for gas. They're going to pay have to pay pay higher for all the inputs and machinery as well. You know, everything, everything's going to increase in profuric acid for some of those, uh, you know, the iron sulfide gold mines, for instance, they're going to have to, you know, pay a lot more for their for their sulfuric acid. Some of them are going to, you know, have be impaired as far as the amount of, um, tons they can produce per year. You know, it's going to have an effect on their, their balance sheet. Um, you know, both for and against. So, there's, it's, it's not all blue sky. It's, it's, it's difficult patches as well, because the reality is, you know, it's, who, who can get the commodity they need to use to produce it, who can get the drill bits, who can get the parts. Because remember, China owns a lot of the machinery, um, as well. Um, you know, one of the things that we found with the the rare earth mines is that most of the machinery, sorry, the rare earth refineries, most of the machinery comes from China, um, you know, to refine metals. So, you know, one of the things that has been pointed out by a couple of the refiners is, you know, are we sure we're going to be able to get the access to the machinery that we need to refine these metals? It's, it's, it's a multi-layered thing, you know. It's not just offtakes. It's machinery. It's electricity. It's, it's inputs like sulfuric acid and helium and things like that. It's, it's all, it's all going to come. It's all very sticky. Um, and so, you know, we're going to have to be very thoughtful, you know, what we invest in, because, you know, some, even some of the miners might be overvalued if they've got inputs that they can't get hold of. Um, you know, for instance, some of the copper miners, um, are are very, uh, fragile to sulfuric acid shortages, and others are not. You know, some, some, some of the more remote mines have learned to make it on site because it's hard to deliver, but some of the, the, you know, some other mines might be more fragile to it. So, it's a mine by mine investment analysis that you have to go through. Not every, not every sector is going to be a winner like that. You know, we found that with rare earth and lithium, and that some, some were winners, and some were losers. You, you're going to have to be very specific about what you invest in. Um, and you're going to have to make sure that you've risked it and analyzed it a lot, because I think some of the beneficiaries will get, you know, you know, do better than others.
Craig, it's, the connection is is kind of poor. Um, it's breaking up. And I just wanted to say, it's, it's not only about, you know, you can, you can put in billions and trillions of capital, but but actually, it's also about human resources. And, uh, you just attend the mining conferences. I think the average age is, I don't know, between 60 and 70, probably. And there's just, there's just a lack of, you know, young talent in the industry, unfortunately, when it comes to geologists, when it comes to to to mining engineers. And I think this is, this is bottleneck is something that's vastly underestimated. Um, Luke, I think we'll just, we just do one final question. It seems that, um, that Craig, unfortunately, has a poor connection. Um, so, one, one final, why final question. Um, it's always at the end of your reports. How do we make money with it? Yeah. Um, you're, you're 50% cash and bullion at the moment. You've been, um, pretty positive on Bitcoin, but then actually, uh, sold your position at, I think, with a pretty good timing. We haven't, you know, nobody cares about Bitcoin at the moment, it seems. Yeah. So, um, we're definitely not in a super bullish environment, but we haven't seen any like big, big washout either. So, I, I think we haven't seen a panic low yet. But from an asset allocation point of view, now we're like April 2026, really, for the, for the long term. What, what would be your advice for, let's say, an institutional client, um, with, when it comes to asset allocation, long-term asset allocation in this environment that we're having now, and that we're forecasting for the next couple of years?
Yeah, I think you're going to want to have an elevated cash position because that's going to be your ballast and and your optionality, and you're going to get paid to wait with that cash. I think you're going to want an elevated gold position. Um, and I think that gold, to me, it should be expressed as physical bullion, because what we're really hearing in all these things is, if you don't hold it, you don't own it. And and and that things are, um, we are watching almost every day, international law, slash property rights, slash are being stretched, to be polite. And so I think you want to have some cash. I think you want to have some gold. I think you want to be invested where in well-capitalized companies that are, you know, set to position from the bottlenecks that we're discussing here, which are, you know, in in materials, in electrical infrastructure, in industrials. Um, I think, uh, you know, that's, and I, and I think when you look around the world where stocks are cheap, and somebody is, you, where is sentiment awful? Um, still China, too, right? Chinese, you know, you're considered a trader for for saying the Chinese stocks look cheap, and they actually are competing well. Um, but in the short run, again, I, to me, there is nothing very interesting about sort of any markets other than cash, gold, and some of these, you know, commodities markets that are in, in these, and in these bottlenecks, if they're well-capitalized, until we get more clarity on how this situation is going to resolve, because I, I, you know, I'm reading a book right now about the Battle of Gallipoli, and in particular, the globalized world, and how that forced Britain's hand to do some things that maybe, uh, weren't in Britain's interest, but it rhymes so much with today, which is the globalized supply chains in the world are forcing the US to do some things that probably aren't, they're probably more like Japan bombing Pearl Harbor, because like they have to do something now because it's only going to get worse. And of course, didn't work out great for the Japanese in the long run. So for me, I really am just trying to focus on those, you know, those areas where there is a very concrete five-year outlook of very po, and that's electrical infrastructure, well-capitalized, um, on these, on these, uh, industrial and commodity supply chains, and I, I think gold and gold miners fit in that as well.
>> Yeah. Talking my book, actually. Um, I think we, we've got a pretty similar, um, asset allocation. So, Luke, I think we've, we've lost Craig. Um, but still, it's been a great, great, great discussion. Um, thank you for taking the time that early. It's, it's, it's, it's not easy setting up a call, uh, between Australia, Europe, and the US. But thank you very much for your time. Thank you very much for your terrific work over all those years, you know, um, discussing the, the, the forest for the trees, and and actually, you know, what's, what's going on in the world, and and really trying to, um, to make sense of all what's, what's happening. So, thank you very much, Luke. It's been a pleasure. All the best, and yeah, talk soon, my friend. Thank you.