Transcription
There is a seismic shift occurring in the silver market, from west to east, from paper promises to physical delivery and real price discovery. According to my guest today, Andy Sheckman, who thinks the current price of silver in no way reflects its real underlying value as both a critical mineral and a monetary metal. All of this, plus the latest Q1 when it comes to central bank gold buying. Impressive numbers, but Andy believes it could be massively understated, and we could be looking at a record-breaking quarter for central bank gold accumulation. All of this and so much more ahead.
And guys, the replay is still available for a limited time from the first Commodity Culture boot camp. We got fantastic feedback. Use the link in the description. It's join.jessedday.ca. And now, Andy Sheckman.
Andy Sheckman, great to have you back on Commodity Culture. I want to start by asking you what you think is going on with this pattern that's emerged since the Iran war kicked off in regards to gold and silver. The metals rise when it appears there will be peace, and they fall again when it looks like the war is back on. Now, some were speculating this is a rush for liquidity. So, we're seeing forced selling of precious metals. You know, one example might be Turkey has been known to sell it. It sold a large portion of its gold reserves, many believe, to then go ahead and turn it into US dollars and buy oil because of the whole situation. But it's been almost five months since the war started. This pattern appears to be continuing. Is global conflict just straight up bad for gold and silver, or will that safe haven aspect of the metals kick in at some point?
Yeah, I've been doing this for a long time. I've seen several of the wars that, you know, all of them really, going back to the original Desert Storm, and they all face the same predictable pattern. And that's why I don't put a ton of stock into their selling what's liquid first explanation because, I guess, it's a convenient narrative, and in some cases, it is true, but it doesn't hold up in my mind very well when we see that same pattern repeat over and over and over again. I think the reality is gold's price is, I guess, in the short term, it's set in the futures market. As much as that sucks, it's true, but not by people taking delivery of physical metal. These are two very different markets. And, you know, when the geopolitical headlines hit, the algorithms, I guess you could say, that direct the macro funds, they move to align with the expectations of central bank policy. In other words, the Fed's not going to lower rates, or the Fed may be forced to raise rates to quell inflation. It just seems backwards. And they seem to quite successfully, often temporarily, they overwhelm that safe haven narrative.
And what I take umbrage in, I guess, is that the banks, central banks keep buying the one thing they can't print. This first quarter, central banks purchased more gold in the first quarter than ever before. The funny thing is, they said it was 16 tons, but the World Gold Council came out and said, "No, you're lying. It's actually 15 times that. It's 240 tons." They're not reporting everything. It's a, it's, it's not an obligation. It's voluntary. And it's probably much more than that. So, the bottom line is, is that as the price is being driven down, the most well-informed traders in the world don't care. And I think that's the one thing that I think people should look at. You can look at any of these patterns, and we see the same thing, and gold gets driven down. Um, it's counterintuitive, but what leads to gold moving higher often is the ultimate reaction of the Fed, where they will be forced to lower rates. They will be forced to usher in, I believe, a weaker dollar. So ultimately, maybe that's why the central banks continue to buy. They see what's coming, not what's right in front of us.
Yeah, interesting analysis. If this war continues dragging on for longer than many are anticipating, we're kind of almost at that level. I mean, at the end of this month, it will be five months that this conflict has been going on. It doesn't appear to be slowing down. We see these on-again, off-again peace agreements. If this drags on for years, because I don't think that's out of the question. In fact, in my mind, I believe that's potentially the most likely outcome. How do you see precious metals responding in that type of scenario?
Much higher. I mean, as it is, we're looking at roughly an 8% devaluation every year in the dollar, pretty close to that number. And if you continue to see an increased disruption in the Gulf, who's going to pay for this war? Um, they're going to pay for it somehow by creating money, printing money, selling treasuries. Problem is, there's not as much demand for treasuries as there once was. So, they're in a pickle. But the bottom line is, is that let alone the massive price inflation that will be caused by disrupting so much of the world's supply of, of oil, liquid natural gas, fertilizer, all of the things that are very important. The systemic reaction, second and third macro reactions, ultimately will lead to much higher price inflation. Um, so I think inflation is something that I think they've already lost the battle. They may try and act tough by not raising. They did nothing the first meeting. Maybe they'll even slightly raise rates, but they're caught between a rock and a hard place. They raise rates high enough, and they break everything. They lower rates to accommodate, and you reignite the inflation genie. And, you know, inflation is much higher than they're already telling us. But I think ultimately, and in particular, as we focus on Trump's idea of reindustrializing the United States, you have to have lower rates and a lower dollar. That's Triffin's dilemma. Otherwise, and ultimately, I think gold will react very well. Uh, short term, yeah, there'll be some instability. They might even see it fall further. But long term, I don't see how it doesn't perform very well in the face of what is, in my mind, undoubtedly an inflationary path ahead of us.
We're at sub-$60 silver right now, and yet we're in the sixth consecutive year of a silver supply deficit, according to the Silver Institute, with very little mine supply rising to meet that deficit. $60 silver, actually a pretty good price all things considered. But stackers are obviously getting concerned. I see a lot of comments on this channel that we might not make it back to triple digits. What would you say to those who want to throw in the towel on silver? Maybe those who bought in the run-up to $120 and are now potentially regretting their decision.
Maybe they're focusing on the wrong thing. I mean, if, let's start with the Silver Institute data that they say we're in the sixth straight year of a structural deficit. And then I would ask a simple question: How long can demand exceed supply before price finally reflects it? You know, it is frustrating, Jess. It is, brother. If anyone gets it, it's me. But silver is one of the few commodities where the paper market sets the short-term price, and futures traders move the price today. It sucks. Physical availability determines it over time. Um, at the same time, where things are beginning to change is the world is building new precious metals markets in Hong Kong, in Singapore, in Dubai. And that's important because the center of price discovery, which has been the epicenter, has been the CME and the LME forever. It's gradually shifting towards markets that value physical delivery, not just paper contracts. That's a big one, and this is happening right now. So, you know, sovereign buyers, governments are accumulating hard assets. And silver is both a monetary metal but a critical industrial metal, and that's a powerful combo in my mind. So, yeah, it can stay frustrating for longer than people would expect. The market can stay irrational, they say, longer than people can stay solvent. That's all true, but, you know, I guess markets exist to wear people out before they pay them. And if your conviction was based on structural supply deficits, shrinking inventories, and the shift right now towards physical price discovery across the globe, this is a big one. I'd argue the thesis is stronger today than it's ever been. I think a lot of times people make the mistake of confusing price with value. Price is what the paper market says today. Value is determined by fundamentals, and eventually, fundamentals will win, and I think they will this time too.
The sponsor of today's episode is Arc Silver Gold Osmium. Owner Ian Everard is praised even by his competitors as one of the most honest and level-headed bullion dealers in the United States. They have some great prices. You can see some of them displayed right now on screen. You can take advantage of these specials today by reaching out to Ian at 307-264-9441 or by email at Ian@archsgio.com. Make sure to tell him, of course, that Commodity Culture sent you. And now back to the interview.
Do you think the critical minerals aspect of silver is being discounted by too many market participants? Because we've obviously seen it added to, you know, everybody probably watching knows the story. It's added to the many critical minerals list, including to the United States. We've got Project Vault, and the US Import Export Bank committing a very large amount of capital to critical minerals development in the United States. We have China putting on silver export restrictions at the start of the year. Uh, and we have the Russian Central Bank actually announcing, I believe it was last year, that they were going to start stockpiling silver along with platinum, palladium, and other minerals as well. And obviously, it has a huge use in military technology and so many other facets. Do you think we're going to see more of that trend of countries starting to realize the importance of silver as a critical mineral and the market waking up to that fact as well?
I do. I do. And look, when the COMEX sets the price, I don't know. I'm going to be somewhere in the neighborhood. Trades roughly 200 times what could be delivered every day. That has the potential for being a big problem. Um, I'm not saying that COMEX will blow up. Um, but you could see a force majeure if it got bad enough. What you're going to see happen, I believe, with the expanding of this ecosystem of price setting in Hong Kong, as an example, and how they interconnect with the new, the new systems in Dubai and in, um, connecting with Shanghai, with Moscow, with St. Petersburg, ultimately the BRICS, with Mumbai, with Brazil, you're going to see more and more, I believe, movement from west to east. It's the paper western system migrating. It's not metal flowing that way as much as it is the entire system migrating to where price is more indicative of delivery. In other words, it's a cash and carry situation where they're going to set price, uh, in, uh, Hong Kong, and that is for the very first time another price-setting hub to compete with the west, where, you know, it's not going to be as wise to be naked short when the price is being set at the same time in another venue. So, yeah, I, I think this is all changing. And I think that we will see, um, real price discovery, or more of a true price discovery, as time moves on, as we see this infrastructure being built, as we speak, and operational as we speak to finally challenge this situation where, for a long time, it's the proverbial tale that would be the futures market wagging the dog, the silver price. And it just doesn't make sense how you can continue to have structural deficits and increasing demand, um, and sovereign entities accumulating it, and the price not reflect it. You have governments classifying them critical. It wasn't just the United States. The European Union did it two years ago, and China, in essence, did it last November when they said, you know, we're not going to, we're the second largest producer, and we're not going to let go of any of our domestic production. That will stay home, and we're going to minimize exports on top of you know, curtailing in a large degree exports of, um, sulfuric acid, which is used in copper mining, which is the primary byproduct metal for mining silver. In other words, you know, silver is primarily a byproduct of copper, lead, and zinc, I believe. And so when they're mining copper, they find silver. And if you are curtailing and making it more difficult to process and mine copper, well, you're going to cut into the silver. My point is, is that over time, these discrepancies will matter. And having other price-setting entities across the globe, um, who will focus more on immediate delivery rather than futures. We may at some point begin to really see what real price discovery is. And it's frustrating. I understand it. This counterintuitive volatility is very frustrating. But I think we are moving into a system where the West being able to control all of the prices of commodities is maybe changing. I'm not saying it's coming to an end, an abrupt end, but certainly, you have to think twice when you have real entities with real liquidity and hopefully, I think you'll see real volume start to challenge the price setting of the West and the LME and the CME.
You mentioned central bank gold buying. We have now seen gold officially surpass US Treasuries as the largest reserve asset. This was at the end of last year. This was originally reported. As you mentioned, they're continuing to buy at a record rate. Do you think they see something coming up ahead in terms of a monetary reset, or gold being reintroduced to the monetary system in some way or another? Is it more innocent than that, in that they're just simply continuing to protect their wealth from counterparty risk in the aftermath, of course, of the US and their allies seizing Russia's FX reserves? What's your take on the reasons behind this accumulation, and if perhaps they see something ahead that the general public isn't aware of?
I mean, I mean, exactly what they're preparing for, I'm not sure. Or anyone who says they know, I guess you could say, is speculating. But I think we can observe what they're doing. What the footprints are saying. And to your point, central banks have purchased over a thousand tons of gold a year for, I think, three or four consecutive years. And these are the most, let's say, informed financial institutions in the world. And well, they have access to information, Jess, that most of us will never see. And when they all began moving in the same direction several years ago, it caught my attention. And doing so quietly, and yet consistently. And the most important part is regardless of price. It's they're pricing elastic in their accumulation. They don't care. And that's why I'm paying attention. Because look, Poland is a good example, right? They bought more gold than just about anyone for the last couple of years. Um, and the head of the Polish National Bank, um, recently came out and said their target is 700 tons. Um, but I wrote something down because I wanted to read it to you. He also said something, you know, what are they preparing for? Not saying this is what they're preparing for, but to hear something like this coming from the head of the Polish National Bank, who's bought more gold than anyone the last few years, I found to be very interesting. His name is Adam Gapinsky. And, um, he, they asked him, you know, well, he clearly, why are you buying gold? And he recently, he said, well, we've been consistently buying gold, taking advantage of these recent price drops. He said recently at a price conference, that isn't what got my attention. I thought, found that to be interesting that as the price was dropping, the paper price, Poland is accumulating it. Tells you where they think it's going. But what he said is something I've never heard a central banker say. I'm going to read this to you. He says, um, in these difficult times of global turmoil and the search for, here's number one, a new financial order. So he's saying tumultuous times and the search for a new financial order, gold is the only safe investment for state reserves, and gold will retain its value. Number two, even when someone cuts off the power to the global financial system, destroying traditional assets based on electronic accounting records. Let me read that one more time. Um, in these difficult times of global turmoil and the search for a new financial order, gold is the only safe investment for state reserves, and gold will retain its value, even when someone cuts off the power to the global financial system, destroying traditional assets based on electronic accounting records. Of course, we don't assume this will happen, but as the saying goes, forewarned is forearmed, and the central bank of Poland is required to be prepared for even the most unfavorable conditions. I mean, I don't know, Jess, it seems to me that the footprints are unmistakable. You got record central bank buying. You got record repatriation. All these countries bringing back their gold from the New York Fed and the Bank of England. India, France, Germany, Holland, um, Austria, Turkey, Poland, they all brought their gold back. They want physical possession and removal of counterparty risk. You got new physical exchanges, alternative payment systems, BRICS, um, the BRICS bridge, and, um, the Chinese CIPS cross-interbank payment system, settling imbalances in gold, and a steady migration of gold from west to east. It's been the largest export of the United States for like the last six months. And, and to me, those aren't isolated events. These are pieces of the same puzzle. I don't think we've even seen the finished picture yet. So I guess, you know, could it culminate in some type of reset? Maybe. Could it simply be preparation for this new multipolar world we hear about, a monetary system where gold plays a larger role? Maybe. But, um, I don't know. I think I would leave it with this and say gold doesn't have to replace the dollar to become dramatically more important. And it just has to be reintroduced as a new, or not new, a trusted reserve asset, which it is, and, um, a settlement asset, which it is, or collateral between nations, which it is. So I guess we're already starting to see signs of that. And, um, I don't know. Um, I guess I would say that by the time governments tell you what's really happening, the people closest to the system have already positioned themselves. And look at what the central banks have been doing. And you can see that is what they've been doing. Positioning before it is in vogue, I guess you could say.
Interesting to note as well, the government here in Serbia recently repatriated their gold from Switzerland. Uh, definitely does seem to be a global trend, as you pointed out. I want to talk about what could be a sovereign debt crisis, but what could also be a headwind on precious metals prices, and that is rising T-bill rates. Do you think they're putting pressure on the price of gold and silver? We're seeing yields rise kind of across the sovereign debt world, along with the potential for inflation ahead due to the rising cost of energy. Some believe that's going to force the Fed to at least not cut rates and potentially even raise rates at some point. And at that point, of course, if you can get a decent return on treasuries, the thought is gold becomes less attractive, as it doesn't have a yield. What are your thoughts overall on the sovereign debt market, its impact on precious metals, and maybe if you could talk about the potential for a crisis there as well, because a lot of people are talking about that.
I don't know. To me, it kind of misses the bigger picture because again, this traditional argument is that higher treasury yields are bad for gold because gold doesn't pay interest. I guess that's fair enough. I would say, but what really matters to me isn't the nominal yield. It's the real return after inflation. And if you believe inflation is 2% or they have any reasonable shot of obtaining 2%, then a 5% T-bill looks great. See, but I don't. And I think that the real erosion of purchasing power is much, much higher than the government reports. So the safe yield may not be preserving your wealth at all. In fact, you're going backwards in real terms. And this is the dilemma. I mean, if energy prices keep rising, which we said earlier they may, then inflation stays sticky. And the Fed, can they keep rates high? I mean, if they do, that means paying even more interest on the 40-plus trillion in debt. Or they can cut rates and risk even more inflation. Neither is a great option. And I think, you know, this is why I personally pay more attention to what the central banks are doing. Because the central banks aren't buying record amounts of gold because they're worried about next month's rate decision. They're buying it because they understand the long-term consequences of too much global debt and debasement of the dollar. Um, so, yeah, I mean, look, could the T-bill rates pressure gold in the short term? They already are. That the even the anticipation of perhaps higher rates are, but the paper market always seems to react to these headlines. The long-term trend is not driven by that. It's driven by purchasing power, or eroding purchasing power of the dollar, the massive amount of debt we have, and more than anything, the confidence not only in the currency but, like you said, in the Treasury market, um, that has been weaponized, the fiscal irresponsibility of this country, and the monetary stupidity that we've exhibited for a long time. So, in my mind, gold isn't really competing with treasury bills. It's competing with the long-term loss of fiat purchasing power. If you understand that, then the record buying by central banks makes perfect sense because they understand they're accumulating the one thing they can't print because they understand that ultimately, the erosion, as Dr. Fran Pick said, the first book I ever read in this industry, all currencies, fiat, are inherently meant to die. So saving in dollars is like holding a melting ice cube. You transact in them, but you save in assets. And the same thing would be true for treasuries. The higher the yield, you'll get to a point with rising yields where the whole system breaks. Can't do that. And so they're caught. And I think understanding this, the central banks do using price to misdirect for the central banks to accumulate. Well, it seems like a fairly stable, sensible strategy. And I think that is what they're doing. Most of the world is using the Western suppression against them. They're the ones that are accumulating. This is the flow heading that way. This is the arbitrage we've seen with silver for over a year, where you're getting this 10, 11, 12% kicker by delivering to China. Won't end. I think they understand this. And, um, I think that you will see a continued accumulation of gold by the central banks, not to become wealthy, but because it is wealth. And the paper currency that we call money is literally evaporating in terms of purchasing power right out from underneath us. So I think you have to have a long-term outlook on this and not be distracted by the short-term noise. Uh, because when you see the amount that the central banks are buying as the price is getting, you know, carjacked, it should tell you what it really is. It's misdirection.
You've spoken several times about a shift from west to east when it comes to the precious metals markets. You've touched on BRICS. I'd love to dive a little bit deeper because this is a topic we've discussed on this show a few times. We've seen, you know, more and more of a division geopolitically between the east and the west. What are your thoughts here on the potential threat to US hegemony as we sit here today? You know, a lot of people believe this war in Iran is about the US trying to maintain its hegemony in a very aggressive way because it sees the same things you're talking about, and it's trying to secure its dominance before it perhaps gets taken east. What are your thoughts on the current situation when it comes to BRICS versus the West? Um, how China's involved, how Russia's involved, and how you see that whole picture playing out.
Um, I mean, I don't think we're watching the end of the world. I do think we're watching the end of one system and the beginning of another. I think the dollar and the US-led financial system, well, it's been at the center of the global everything for, I don't know, 80 years or so. That's not disappearing overnight, but it's becoming increasingly clear, Jess, that many of the countries want alternatives. This is the reason I've spent so much time talking about the BRICS, not because I think they're replacing the United States tomorrow, but they are building a parallel system to challenge it. I mean, it's right in our face. New payment rails, as I mentioned, the CIPS and mBridge operational. The CIPS, the cross-interbank payment system, signed up the countries in Southeast Asia, ASEAN, I believe they're titled, and these countries represent China's largest trading partner already, 800 million people, 30% of global GDP, something like that. Um, they can settle or trade in cross-border in a system not connected to SWIFT and settle in balances in gold. And mBridge is now operational. New trade relationships. You're seeing it all over the place. China and Brazil are striking them all over the place. And China and Saudi Arabia and the United Arab Emirates, and all of these countries are striking new trade relationships and new physical precious metal markets in places like Hong Kong, as we said, Singapore, UAE, St. Petersburg. And when I see central banks buying record amounts of gold while the East builds infrastructure to price and settle physical metal, I don't see isolated events. I see a global monetary system, Jess, that's becoming more multipolar, period. And America isn't finished, but we're no longer the only game in town. And I think gold and silver will play a much bigger role in that next chapter, maybe than they have in this last one. Um, I think the BRICS are being quiet because, you know, at the 12th hour, two years ago, when they were bringing mBridge public, you know, the Bank for International Settlements, their innovation hub helped design it with China, Hong Kong, Thailand, United Arab Emirates, and Saudi Arabia. They built it. And then at the 12th hour, they said, you know, at the BRICS summit right before, yeah, we're pulling the plug on mBridge because we can't be part of a system that would allow any country to sidestep Western sanctions. Just pretending as though they just realized Russia was the iron BRICS. And so I think it really aggravated the BRICS countries. And so that's now being sold to us as the internationalization of the yuan. They are building all of these rails now. They talk about the expansion of the Shanghai Metals Exchange. You're seeing it already. The first one was built in Hong Kong. That's really important. Set aside the price setting, but when gold is delivered, it has to come out of Hong Kong. And they want to expand. They've already, rumors are or news is, and it's very quiet, that the one in Saudi Arabia is operational. It will connect with the one in Dubai. They want to build one in Switzerland and in London. They want to build them all throughout the Belt and Road Initiative to settle in balances in gold. Instead of accumulating treasuries, they'll accumulate gold and trade with one another cross-payment systems. Now, this is being sold as internationalization of the yuan, but make no mistake, it is the rails of the BRICS. And I think they're doing it to specifically not to antagonize this administration, but, you know, it is very much the exact same thing. And that is a path that is a slow-moving path, but chips away at settlement and dollar, chips away at the reserve status as less money is being recycled into treasuries. And, uh, that inflation that we've sprayed, as Luke Roman says, all around the world by countries taking our treasuries, wanting our treasuries, accepting our inflation, as now he says, like taking that fire hose and bending it into the basement window of our own house, and you'll see much higher price inflation simply because no one wants our treasury. So who's going to buy them? Does it mean the Federal Reserve has to buy them? Monetization, create money to buy them. This is a situation where, to me, it's about not de-dollarization as much as it is de-treasurization, if that were a word. And, you know, the dollar is not going anywhere tomorrow. They will continue to settle and trade in dollars or to trade in dollars and to settle dollar-based debt in it. But make no mistake, I believe they will be accumulating commodities like gold instead of US treasuries. China is a perfect example. It's over-hedged its treasury holdings and they're buying gold instead. So, it's just a gradual shift. And I think people who analyze the BRICS have a hard time accepting the way that they do things, methodically and plotted and over time. There is no instant gratification. But make no mistake, you can see the rails are being built, and they are significant in terms of what they would absolutely mean if they really became mature. So, yeah, I think it's still something we'll continue to hear much more about.
Well, Andy, tell us about Miles Franklin Precious Metals. Tell us about Miles Franklin Media and anywhere else people can follow your work online.
Appreciate that, Jess. Yeah, Miles Franklin Media. You've been on here, one of my favorite interviews. And Michelle and I do four or five interviews a week with all sorts of different guests, ranging from guys like you to Luke Roman and everything in between. I appreciate that plug. Um, there are a lot of things that we have very exciting things that will be announced in the coming weeks, innovative things, and relationships with people I've worked with for many, many, many, many years all around the world that are presenting some unique opportunities. But we've been doing this now for 36 years and never had a material customer complaint. We make mistakes, try to own up to them, and try to make them right if so, but never enough to create a complaint. If anyone wants current pricing, the best way to get that or any questions answered that you heard here or anywhere else would be to send us an email at info@mfranklin.com. Request our price sheet. We update it a couple times per week. We do our best to compete or actually match or beat anyone. Price is usually never an issue with us. So info@mfranklin.com to request the updated price sheet. We do have a website where we allow very limited purchasing up to about 10 grand. But, yeah, I always appreciate coming on with you, Jesse. You know that. I appreciate it very much and hope to do it again with you real soon. But thanks for having me on.
Fantastic. I'm going to put links in the description to Miles Franklin Media, Miles Franklin Precious Metals, as well as that email address. Andy, as always, thank you so much for coming on the show.
You stay well, buddy. Talk soon.
Thank you for joining us today. Hey, this episode is brought to you by Arc Silver Gold Osmium. They have some great prices on precious metals, bullion products. You can see some of them on your screen right now. These are while supplies last and subject to change. So, reach out to owner Ian Everard today at 307-264-9441 or by email at Ian@archsgio.com. Make sure to tell him that Commodity Culture sent you. And access the replay of the first Commodity Culture boot camp. We had a two-hour session where I went through my entire portfolio A to Z. What I own, why I own it, what I'm watching, and the lens through which I view the commodity sector for a limited time. It's still available. Go to join.jessedday.ca. Link is in the description. And I'll see you guys in the next episode. Commodity Culture is a series on commodities and natural resources. If you would like to see more, be sure to subscribe and hit the bell notification so you're always up to date with the latest episodes.