Transcription
Hello and welcome to Money Markets and More with me, Dominic Frisbee. It is my pleasure today to welcome to the show Luke Groman, who is one of the most original, I suppose you'd say, macro thinkers in the world today. and he's been ahead of the curve on debt, on currencies, on fiscal dominance, on the bond market, and uh perhaps most relevantly of all on gold. He writes the newsletter um the forest for the trees, which in the UK is branded as the wood from the trees. That's how we say it over here. Uh welcome Luke to the show. Lovely to speak to you.
That it is the the we we say the wood from the trees, but you you obviously say the forest.
We say yeah, you can't see the forest for the trees in America. So that's uh you know close uh like so many things between our cultures, right? It's we we you you guys have a perfectly good phrase and we say we're going to do it our way.
There you go. So where your your latest edition of your newsletter, which by the way I love was sort of describing the I mean obviously we I think we'd all like to be chairman of the Federal Reserve in theory, but when it actually comes to the nitty-gritty of the job, it's not such an enviable position. and we have a new chairman of the Federal Reserve and you were describing the difficulties, the hard choices he's going to have to make. So, why why don't we start by talking about that?
Sure. He's in a he's in a tough position where he's have to make some tough choices and and what I mean by that is and what we described in in the letter you're referencing is [snorts] any policy he makes is going to have a macroeconomic impact that then have second and third derivative macroeconomic impacts. some of which are attractive to him but then the side effects of those are are very unattractive. So for example if he hikes rates to fight inflation fighting inflation is a good thing. The challenge is that that will strengthen the dollar and when the dollar strengthens that is going to start at some point maybe not right away but there's a level of dollar strength that gets what we've called termed quote unquote too strong. And once the dollar gets too strong, that starts to trigger foreign selling of dollar assets because there is roughly 13 to 14 trillion of dollar denominated debt around the world. And so uh at the same time as an offset there are 27 trillion net closer to $70 trillion gross of dollar denominated assets also held around the world. And so once the dollar gets too strong, foreigners have to either to defend their currencies or for other reasons sell dollar assets to raise dollars to service that dollar debt. And what do they sell when uh when they need dollars? They they sell dollar assets. And they tend to start with Treasury bonds because they're most liquid. They're the easiest to sell. And so that's an example of, hey, I want to fight inflation. Great. We're all in favor of fighting inflation. However, raising rates strengthen the dollar. You get these nasty side effects like you would with uh, you know, some taking some sort of, you know, prescription medicine. Uh, if the dollar is weakened, if he cuts rates, uh, weaken the dollar, now you're going to be weakening the dollar into inflation that's already too high. You're going to run the risks of higher long-end rates, which are also problematic, um, given debt loads around the West uh, in particular, but globally. uh if you um if you want to try to scare capital out of stocks into bonds to help finance the debt, uh you end up uh here too. So much of the US consumer is on the margin driven by um equities. uh a chart we've looked at using IRA or we've put together using IRS data shows that net capital gains plus taxable IRA distributions in the United States roughly 200% of the annual growth in US consumer spending. So and consumer spending is about 2/3 of GDP. So you mathematically cannot grow consumer spending unless stocks rise because net capital gains and taxable IAS that doesn't even include all of the incentive comp equity etc of of execs. So if you again say, hey, we need to scare some capital out of stocks into bonds, help finance deficits, take some easing off the ball, great. Reduce wealth inequality, great. All good things. The challenge is that's going to quickly manifest in weakening consumer spending, possibly even a recession if it goes too far. And when that happens, the deficit will actually turn around and increase as we saw in 2022. So those are just some examples of the policy choices in front of him which have on the first derivative understandable why he might choose certain of these but then on the second and third derivatives uh lead to some things that are are inconvenient initially but then can be very unpleasant uh uh and even systemic if they're allowed to kind of go on without uh without being addressed from that point.
M one of the things I've noticed actually is that to Americans, Americans put much more into their stock market than British people do. Your your stock market is our housing market as that's that's the okay you you know it must not fall.
Um would in the context of all of this I suppose my next question is what is he likely to decide? I guess we have to look at his provenence. He's Trump's man. Um, and Trump's a, if I'm right in saying he's he's a weak dollar, lower interest rate guy. I mean, do you think we head to a weaker dollar, lower interest rates? What is he like to decide and what are the ramifications for the dollar?
Ultimately, yes. I think he will go to a weak dollar, lower interest rates. I think based on what how the markets are reacting, some of the commentary from Wars, etc., I think they're going to try to thread the needle and first address the temporary well the rise in inflation we've seen since the start of the war with Iran and and try to thread the needle of we're going to tighten for a little bit. We're going to let the dollar strengthen for a little bit. We're going to let risk assets fall for a little bit and try to basically take the stock market off the boil without creating any of these second and third derivative effects. Raise rates, tighten policy a little bit without creating any of these second and third derivatives effects, at least before they get too bad. and then get back to what we ultimately want to where they ultimately I think they ultimately want to be which is lower interest rates, lower dollar uh and higher nominal growth rates
presumably in time for the next election.
I think so because the reality is the debt levels are so high and everything is so interconnected that they really can only run this policy for a few months at a time before it starts to so I think the plan you know and [laughter] as Mike Tyson famously said right everyone has a plan till they get punched in the mouth I think the plan is let's tighten a little bit we're okay letting stocks fall for a little bit we want to try to get inflation back down get oil back down uh and then maybe under opices of I won't call it a full-on crisis, but just a little bit of a
something where the markets can can understand why you're cutting rates or it gives you the political cover to cut rates. Then they start cutting rates presumably still before the American midterm election and uh and then away we go.
Okay. So, you know, I suppose my question is how long is a bit? Two or three months, four months, something like that,
probably. Yeah. Um, does do the authorities I mean, it it it's almost we want the market to go up therefore it it's like they have total control. Is this is this why everyone studies Fed policy so scrupulously because it does determine where everything goes rather than the actual
market the free market and the fundamentals and all of that.
Yes. uh in my opinion um I think since 2008 and the great financial crisis you know the markets I don't think have not been truly free for a very very long time I think there've been it's all a matter of degrees of the of of relative freedom of the markets and I think from 1982 85 90 something like that up until the great financial crisis it was an era of in the grand scheme of things certainly relatively free markets and I think after 2008 we have been >> gradually marching away from or to lower levels of relative freedom of these markets and more as markets of uh tools of policy or utilities of policy and I think we're still we're increasingly moving in that direction and now there's overlaying on top of all of that a geopolitical angle of suddenly We are uh placing higher in the hierarchy of importance above even free markets. National defense, national security, the recognition that perhaps just being a slave to free market dogma is not the beall endall if it leaves you in a position where your defense industrial base has been hollowed out to too great of an extent. So those types of questions are clearly affecting the the free market at this point.
It's poss it's not really possible to have a a really free market if China is massively subsidized because then it's competing at a level which isn't
which isn't fair.
I mean, it's and it's you've got China doing their subsidies and and some of the challenges you know, the United States subsidizes too. It's I would argue we've done a much poorer job of subsidizing. So the Chinese have spent trillions in subsidizing factories, etc. through interest rates, subsidies, whatever else they do. And we've subsidized keeping our banks afloat with bailouts and $8 trillion in wars and, you know, $3 trillion in Afghanistan to take Afghanistan from the Taliban and then give it back to the Taliban. And you kind of say, well,
who got better who got better value for their subsidies? to us
or the Chinese who have
overbuilt capacity in some areas but other areas very useful capacity uh infrastructure etc. I think in a lot of ways they've done a better job of that and there's some reasons that's cultural. Some of it is they have that luxury because they're not the world reserve currency issuer. So there's things they don't really have to do
um that we sort of have to do as global hegeimon.
Um so yeah absolutely the subsidies are are absolutely a factor but it's it definitely leads into that
not free market. There's so much I want to ask you Lucas just in listen to there's about four different ask him about this ask him about that so I'll try and I'll try and keep it measured but I suppose I suppose my first question is and and this follows on from a lot of your stuff that I read a few months ago and you know Trump was elected one of the things he's prioritized is the reindustrialization of America and he wants that partly because he's a champion of the rust belt but also for important strategic reasons you know America needs to be producing ing things like chips and and iron and you know whatever it is antimony whatever the commodity is um and this was a big theme of the early Trump years and there was a big sort of investment rush into strategic metals and in fact America's suddenly become a really good jurisdiction for mining where where it just wasn't under Biden stuff couldn't get permission but maybe since January February it's all come off a bit and a lot of those speculative mining plays you know as speculative mining plays do they've come off they've lost their value.
Um, but let's talk about this reindustrialization and the the strategization of of American commodities and and factories and so on and and how that leads to inflation inevitably and whether that's still a real thing. Let's let's talk about that big because it's it's a huge theme. It's a huge huge theme.
Um, you know, and I think the simplest way to to break down and pull threads from after that is the offshoring of the defense industrial base of the United States was disinflationary. It's why we did it.
You move it to lowcost countries, you can bring prices flat to down or maybe they don't rise as much and and but your your production costs drop faster than that and so your profit margins for your companies rise.
Um, you keep cap wages and wage growth. that's disinflationary because if uh your unions or your workers get too much bargaining leverage, you just ship their jobs to the lowcost countries like China. And so that whole dynamic was disinflationary. In my opinion, it strange credul to think that doing the opposite of that, unwinding that disinflationary 20, 30, 40year trend will also be disinflationary. I think when you kind of break it down to that sort of first principles, I think you can only conclude it's going to be inflationary. Then the question becomes how inflationary where and can things like robotics and AI and and sort of other new disinflationary technologies, productivity drivers offset the fundamental inflationary nature of rebuilding factories, reinvesting in human capital, reinvesting in infrastructure and electrical grid and all those things.
Kenneth,
in my opinion, no. Um, but there's timing aspects to it and that's why I kind of measure it. I I you've got structural secular shortages of or tightness of of labor in things like welders, electricians, engineers. 40 years of Americans
have been told don't go into the skilled trades. don't go into uh engineering, go to business, go to finance, go to um these other these other fields. And these are not things that you can just, you know, bring in a boatload of of of lowcost immigrants and say, "Okay, now you're going to go well our infrastructure." There's there's even if you did that, there is a, you know, language, culture, schooling
leeway that's measured in years, if not decades.
Yeah.
Um and so that part absolutely going to be inflationary. The reason why I then metriced myself is this AI tech I get tech is highly disinflation
highly disinflationary but the weird thing within it is with AI in particular it's a technology that is undermining the tax base of the United States
uh half of our tax receipts come from from employment uh and this is broadly white collar employment that it's going after. And these are people that have never seen this type of competition before. And and being in Cleveland in the Rust Belt of America,
this is all so familiar to me uh because I've seen this with, you know, my my late father-in-law was a union official in Cleveland and I would golf with him and his two other union official buddies every weekend. You know, 99, 2000, 2001, China goes into WTO, 2002, 2003. I saw real time some of the same denial, anger, bargaining, depression, you know, acceptance, you know, uh, uh, stages of grief around, wow, you know, the chi Chinese, it's not going to be a big deal. Well, they're cheaper, but the quality is not as good. Well, they're cheaper, the quality is good, but they're not going to take that many jobs. Well, they're okay.
Where are we now? In denial. We're I think we're still in denial and maybe a little bit of anger as it relates to some of these white collar jobs, but that that's deflationary on one hand, assuming you're willing to let that deflation impact the bond markets, right? Because now you're taking down receipts initially.
And to be clear, I think AI is going to be a huge boom productivity driver.
Sometimes more productive.
Yeah, for sure. To and and
I don't even exist. [laughter] And and so but as you take those receipts down,
yeah,
while you're taking your expenses up here and you're subsidizing some of this stuff here and you're already at a 100 right now in America, entitlements plus interest on the on the debt is already at roughly 100% receipts. M
so you're [clears throat] talking about inflationary trends here that will drive interest rates up which all else equal which then put upward pressure on entitlements plus interest expenditures of the government and your receipt which are already 100% receipts and AI
may be drawing down initially I think ultimately it's a boom in receipts but the initial reaction of this disruption like we saw in the rust belt is it's it's deflationary for receipts that then gets you into this weird place where that is on the surface deflationary if we assume the government's going to stand aside and go, "Oh, we don't have enough money in receipts to pay entitlements and to pay interest. So, we're either going to cut off boomers or we're going to skip payments on the national debt or default." And the answer, of course, is they're not going to do either of those things. They're going to print the money to to pay the interest and the entitlements. And so, that's why AI is why I kind of hedge a little bit here on that because I do think ultimately it can offset it. that there's this interregnum period from as AI is kind of spreading almost like a productivity virus if you will. The pace at which it's moving is incredible.
That's the harder part for me to kind of say how does that net out against to me what's very clearly inflationary on this industrial
re-industrialization stuff. But the the the re-industrialization of America, I suppose that was the the underlying question was it it is still a thing. It is still a thing to be investing in to be long even if it's sort of having a bit of a pullback at the moment.
In my opinion, yes. This is not a because when you you can go back now three separate administrations. Trump administration started talking about it in 16. The Trump administration won trade war one. Biden came into office and and for as much as there were a lot of differences between Biden and Trump when you look at the at their policies visav the re-industrialization of America, Biden came in and did even more aggressive semiconductor sanctions on China than Trump ever did. Okay.
Um the actually the the uh private total manufacturing construction growth under Biden was far greater than under Trump. Some of that was related to the political cover of COVID and the stimulus etc. And it went into to be sure different things. They were in more green type versus the Trump administration which seems to also be increasing the expenditure shifting some of the expenditure into less green things. Uh but point being we've had three straight periods now of Trump, Biden, Trump with as it relates to industrial policy basically a version of the same thing which is more is better. And so I don't think that is going to change uh for the rest of this term and probably for whoever comes next because I think it is I don't think it's being driven by Democrat or Republican or Trump or Biden. I think it's coming from the US defense establishment and the US intelligence establishment. I do know that certainly from an environmental point of view with industries that are maybe you know not environmentally friendly you know oil and pipelines and m permitting for mines it's that has definitely changed under Trump has it
yes absolutely
yeah okay um let me ask you I haven't been to the states now for 18 months two years but when I was there then inflation was very real I noticed it and my mom lives in California and so for example I remember going to the supermarket and three onions they might have been organic onions but there were three onions cost $5 and I was like how can three onions cost $5 and I we bought I have a I bought a pineapple from Costa Rica and in my local shop in London it costs £125 which would be $150 something like that and the same pineapple in Palm Springs California which is much closer to Costa Rica. It's its original thing was again $5. Why is that?
Is is this all monetary policy or is it is it uh uh what do you call it? Production lines, factory lines, what why is that same pineapple so much more expensive?
I I don't know. I mean, generally speaking, I would say food is twice the price in America than it is in the UK.
And I would argue it's probably lesser quality, too, by the way, in a lot of cases. The organic stuff I would set aside, but it that's um
I wouldn't put the UK as some paradigm for quality food.
Fair, [laughter] fair, fair. Um I don't really know. Um, you know, for me, I'm I'm I'm like the fish swimming in the water, right? If you ask a fish to describe it environment, the very last thing it lists would be the water. So for me where I notice it and and why I would default to it's at least a good chunk of its monetary monetary policy and fiscal deficits
uh would be when I see things like we've seen in the last 5 years which is interest rates went on mortgages in the United States 30-year fixed went from 2.6 2.8% 8% at the lows in 2021
to they're probably close to 7% now. So a near tripling of the rates and home prices didn't fall. They kept going up.
Mhm.
Uh including in areas where the demographics are shrinking. So you have a supply of buyers shrinking. You have the cost of money rising and yet the prices of the homes are still rising. That shouldn't happen. You see that in farmland too over the last 10-15 years in America where uh crop prices generally versus 2011 are flat to down and yet the price of farmland which over long run tracks very closely with M2 money supply in the United States uh they've continued to go up right and ultimately these are two housing farmland are they are uh um assets that are either interest rate sensitive or based on an implied yield right if you're a farmer if it makes it the implied yield you can earn from that from that crop is high enough, it makes sense to buy land. If not, it doesn't. And so you're seeing the same type of dynamic of the fundamentals are saying the pro the underly the the the farmland and the home prices should be getting cheaper and instead they're getting more expensive, which in my opinion tells me it's an inflationary thing. It is a monetary policy thing. It's a deficit thing. And I think bigger picture why that is is historically as the reserve currency the United States we would run deficits and the rest of the world would finance those deficits and that amounted to us basically taking an inflationary water hose and spraying the world with our inflationary water hose and so we would export inflation and in the last 10 to 15 pairs once global central banks stopped growing their holdings of US Treasury bonds in 2014. Something we described that as at at the time was essentially taking this inflationary hose that we were spraying the world with off our front porch and bending it around and stuffing it in through the basement window of the United States house and starts flooding our own basement with liquidity. And I think there's an element of that within what we what I just described of this inflation where I think ultimately we are have a lesser ability to export our deficit driven inflation as a result of what I've called the ddollarization of global FX reserves. basically foreigners are buying gold instead of instead of the treasury bonds and that on a lag at a very slow pace leads to a more secularly inflationary environment in the US than we're used to. So I I it's hard to point at one thing and say, but I think it's ultimately monetary policy which is dictated by fiscal policy which is in part dictated by foreigners no longer financing as great a share of our deficits as they did for a long time. I mean, so much of this has got to do with printing money after 2008, and I think that has changed the world's feeling about the dollar. The the dollar's lost a certain amount of its integrity because of that. And I mean, let's talk about dolization now because it's quite interesting. If you look at China's Treasury holdings, you you will already know this, but I'm I'm sort of I'm telling you, but I'm really telling the the viewers, China's China's Treasury holdings have more or less h haveved since maybe 2013, 2014, something like that. But its US dollar holdings haven't. It's still got more than $3 trillion. So, it's reducing its treasuries, but keeping its dollars.
Um, how real a thing is is dorization?
It is a real thing, but it needs to be defined properly. You can you can ask 10 people, what is ddollararization? And you'll get a number of different definitions based on on what the person
wants it to say, right? It's the old Lewis Carol, right? It's right. uh for me and and what we've been highlighting to clients for a long time, darization is the reduction of dollar FX reserves uh certainly as a share of global FX reserves. Basically, foreign central banks stop buying Treasury bonds uh and start buying gold instead. Yeah. And then also
at the moment we're at about because it depends on the gold price, doesn't it? You know, if the gold price goes up, the share goes up. We're at roughly 50 55% dollars and we're at about 30 bit more than 30% gold.
That's probably about right right now.
And and then I think treasuries are maybe 25% something like that. I know gold overtook them last year.
The door took them last year. Yeah. So you're probably that's probably about right. I would say uh
but do the do the Treasury count holdings count towards the US dollar?
Yes. Like they would in that case in that case they're part of that. So it's
it's that and then it's also the dellarization of global commodities, right? the fact we can see even now Australia is starting to sell some commodities in yuan not just dollars. So it's the loss of the dollar's monopoly in the pricing of commodities that it had for a long time.
Um
the dorization trend on both of those fronts is real. Now dollar dominance in terms of payments still very very great. Uh it's being chipped away at a bit. I saw some this morning in the journal that yuan share of global trade finance has gone from 2% to 8% in the last 3 years. So you know jump up 4x in 3 years is a huge jump but it's and it's statistically significant now right 8%. But it's
so will central banks then hold you on or
in my opinion no the whole goal I don't they don't want yeah
but let's say I'm you know Australian mining company X and China buys my uranium or my iron or whatever it is and pays me in yuan. Australian mining company X is not going to hold that isn't it then going to sell yuan and buy dollars or what will it do what what will it do with with those reserves do you think
I think it would depend on so let's take at the company level and then we can talk about the central bank level at the company level I think there's slim to no chance they're going to hold the yuan I think they're going to do one of two things they're going to where they can particularly over time as this evolves uh I'm sure they're buying quite a bit of things from China uh whether that's equipment or whether it's consumables or whatever it is,
they can spend those right back. It's almost like a fun factory store setup.
Um, and so if they can buy Chinese equipment that they're buying anyway in yuan versus dollars, what do they care? Uh, and so that that's sort of the first settlement dynamic of it. I think at the company level then to the extent they still have yuan left over,
they're probably going to sell those and buy dollars. um they could buy gold, but the company level that's probably not going to happen.
Um and so practically speaking, when they buy dollars or sell yuan for dollars, I would assume they would probably do that with their own domestic monetary authority, central bank, whatever. So now that central bank is sitting on yuan, will they reserve yuan? I doubt it. I think what they would do is they would sell the yuan and buy gold. um they certainly could buy dollars but to the extent more and more
so why sorry why does the central bank even have anything to do with this because if if let's just say you know Chinese comp Australian mining company X uses HSB for examp I don't know which bank whoever it banks with Bank of Australia whatever and then it receives yuan you know when it makes its trade just what involvement does the central bank have in that none
I I wouldn't think I'm going to talk about the the sort of the top down.
Yeah.
Just the the
net flows of it that ultimately um you would probably go through a bank or market maker, but you would end up netting those out at the macro level. Okay. Is how that would work essentially rather than the detail flows. Yeah.
Okay. I understand. And so we know that central banks are in uh buying gold although the rate of that they're purchasing gold has slowed. Um there the countries that are buying the most gold are countries that lie along the Silk Road. I that's what my research has shown me.
Um, and then there's sort of outliers like Poland and so on.
Um, but the the I mean how much more gold are there? I mean, and China, I've done quite a lot of work on this, massively understates its gold holdings.
I mean, quite dramatically. Um, other countries don't do that, maybe can't do that. If you were to put a target on it, we we're saying this, we're doing this interview in summer 2026 by, you know, when does gold overtake the dollar? Does it inevitably overtake the dollar? And when does it take overtake the dollar by 2030, 2035?
I I think it's probably earlier in 2030.
Um, what's 2026? Uh, it's probably 2028 or 2029. Uh, for good. Now, we were just saying before is is we got close, but if we're at 30% gold and 50% dollar, you know, if you have continued buying of gold by central banks, call it a thousand tons a year, and then you've got a I don't know 15% growth rate of in the price.
Yeah. And
you're going to get there pretty close. You're going to get there pretty quickly. And I and I think that's going to happen because the drivers what what the all what the drivers of the ddollarization really are which is China needs to do it.
Um, China needs to be able to buy commodities in its own currency. Not all of them but just on the margin to have that flexibility that optionality to do so allows them to manage the yuan without having to sell FX reserves or without having to slow their economy. they can adjust the rate of dollar outflow by switching over to buying in yuan and net settling in gold. Uh China has set up over the last 15 years this um infrastructure to do exactly that. If you look at um around the world they have offshore yuan clearing banks in every major gold uh hub in the world. They have an offshore yuan clearing bank in London. They have one in Switzerland. They have one in Dubai. They have one in Singapore. They have one in Hong Kong. They have one in Shanghai, of course. And that is to me, they do not want the yuan to be what the dollar has been at all because what the dollar has been since 71 requires you to offshore your industrial base. Yeah. To offshore your productive capacity and the Chinese have zero interest in doing that. And so, but they also
that by the way is Triffin's dilemma.
That's exactly right. Yeah, that's exactly right. And the way they cut the Gordian knot of TR Triffin's dilemma is you separate the medium of exchange from the store of value, which is exactly what they're doing, which is to say, hey, pay in Yuan, you end up with Yuan, Mr. Saudi Arabia, Mr. Russia, you end up with excess yuan in some period of time because you have bought, we have bought more oil, etc. from you than you have bought from us. First, feel free to come in and buy high quality Huawei equipment, BYD cars, solar, all the things that China does. Uh, use those you want there. That those will always those you want will always be money good for things we make. But if there's still stuff, if you still have yuan left over after buying all that stuff, buy gold. And unlike the dollar system since 1970 where secretary uh secretary of the treasury uh Connelly said, "The dollar's our problem, but it's your our currency, but it's your problem." Uh, the Chinese are treating gold as a reserve asset. The yuan is our our currency and it's our problem. In other words, if you buy gold, you exchange your yuan for physical gold, you take your your group of gold home, the Chinese print a bunch of money for some sort of internal uh stimulus, whatever. They're happy to let the price of gold rise because the price of gold rising increases the wealth of their citizenry because they own a lot of gold. It helps recapitalize banks because their banks own a lot of gold. Um, it certainly helps them on the FX reserve side and uh because they own a lot of gold. And so what they are communicating with this system to their creditors is if you have yuan surpluses change them into gold and then the price of of gold is going to go up and you want over time which means the purchasing power of your gold in terms of our goods is going to rise over time. You're going to get wealthier
relative to our production base just by trading with us and you want exchanging it for gold. Whereas on the American side, for 50 years, it's been, "Hey, hold our treasuries."
Mhm.
And especially, as you noted, since 2008, oops, we need to print a bunch of money to bail ourselves out. Sorry, we're going to screw your purchasing power of those treasuries relative to oil and and food and critical inputs, etc. Goods that China makes um that you need. But effectively what you're saying is that China doesn't want reserve currency status for that. No, I think they would.
And that goes against every gold bug in the world. [laughter]
Uh yeah, I can't speak to that, but I I I am very very confident that they have no interest in replicating the dollar system of the last 50 years. If
ego would ego make them want to do that?
No, because I think they're realists. I I mean whatever one thinks about China, they're very pragmatic. Uh they want to do things that work. You know, they're you know, are they the greenest country in the world? No. Do they care? Are they they're holding the banner for green and environmental? No, they were. And and geopolitically, we just see the advantage of all of the investment they've made in the green stuff, which is it works. And when the Americans show up and and and do something that cuts off 20% of the world's oil supply, we went into that crisis thinking that China was the weakest. If you asked, you know, 10 American strategist investors, oh, who's the most screwed by Hormuz shutting down of any of the major economies? And the answer was China and Europe, and that was 120 days ago. today. You ask those same 10 people, they're going to go, China was able to take paying greater arguably at least as well as the Americans, but certainly better than the Europeans. They were to take down import oil imports, 4 to 5 million barrels a day. Um, doesn't mean China can last forever with that being closed, but it's all at that point a pain contest. And the Chinese by virtue of this electric uh um shift, this was not some dogmatic environmental thing. This was cold hard geopolitical reality of we make this stuff, we control the supply chain of it, and we give ourselves optionality by doing this. And that's the same dynamic I think they're applying to the ddollarization in gold, which is nobody trusts yuan. Everybody trusts gold.
Yeah. And so gold is simply the vessel that gives them the ability to buy more in needed commodities in their own currency as a way of giving themselves this optionality to make sure that they can't be choked out by the dollar system. So I I one of the issues I have with gold, you know, when I'm arguing with gold bugs and so on is that um for me gold is a great unit of account tells the truth and it's a great store of value, but it's it's not a good medium of exchange and if you and then you always get the argument, yeah, you can have a payment system built on gold and you have the you have the gold in a vault and ownership of the gold changes hands in the vault. And I'm like fine, but then that requires a trusted third party. at which point it's no longer it's promisory money. It's not money with no liability. And we saw I don't know if you saw this, but some hackers exposed this story three or four years ago where Russia had been buying drones from Iran and paying for them in gold and it was fly it flew three tons of gold down to Iran. I mean, it's just so impractical. So that's I I don't see gold as a as a a settlement money in that as maybe a medium of exchange. I don't see it having a role as a medium of exchange unless you know everything falls apart and we go back to some kind of gold standard. In fact, that's one of the reasons why the 20th century gold standards fell apart because we weren't actually using gold in transactions anymore. It was all promisory.
Yeah, I think that for me I think the transactional use I agree with you uh in the day-to-day role. I think where we are and increasingly where we're going is at the supra national level or the intraational level international level that shipment of gold from Iran to Russia uh I think there's an element of where that's going to this at that level that will happen more partly because trust is eroding but partly because it'll be it's probably politically incorrect but as my grandfather used to say it's it's a a system I refer to as no ticky noi if you right you're we're close to the same age. You don't get your you don't get your you can't pick up your clothes at the dry cleaner unless you you've got your claim ticket. And I
back in either the 50s or 60s, the United States used to send a plain load of gold to Riata every month, every quarter um to settle oil deficits. And I think some version of that is how gold it may have already begun being used in that way, but essentially um every quarter perhaps every month you'll you'll tally them up and you'll load it up uh you know and for certain goods like over the six of the last eight months the number one export of the United States of America has been gold.
It's the UK's number one export. We don't. It always amazes me when I learn that. But we but yeah, I mean we don't produce a single ounce.
Um so this all then points to revaluation of gold by trade essentially. And I think there's always and I have I've been an a a proponent of of this theory or possibility of a revaluation of gold over some short period of time. I still think it's a possibility. I think it's less of a I think it's less of a possibility now or it's it would be more in need more needed to be done in a crisis that I don't see necessarily happening at this point. But I think it's
more being driven by trade essentially at this point where we can see
the gold flows of they're going into China.
Um, China's running this massive trade surplus. This is something I've been talking about with um in in uh our our newsletters of most econ many many economists in the west will complain the Chinese are mercantalist and running this $1.2 trillion trade surplus. It's the biggest on record um in the history of the world as a percent of sort of manufacturing GDP. True. And yet if you look at that trade surplus of 1.2 2 trillion in 2025 versus 990 billion in 2024, which was also a record. The trade surplus of China rose from 990 billion to 1.2 trillion despite the fact that the yuan rose meaningfully against the dollar in that year.
Um, Now China also imported 900 tons, 900 odd tons of gold against that 1.2 trillion. If you valued gold at I think that worked out to 36,000 or $38,000 per ounce. China's balance of trade was even. This has all been seen before. This is the UK and China went through this in the 1760s where the Chinese said, "Sure, we'll send you silk. We'll send you tea. We'll take some of your ceramics. Those are sort of interesting, but you don't make anything else we want. We'll take bullion, though. Send us bullion." Silver bullion wasn't so much gold then. But the problem of course was the Chinese were going to clean London out of silver bullion.
And so trade was ultimately balanced over opiates and century of humiliation blah blah blah. It's repeating. History is repeating in this way where the Chinese are running massive trade surpluses.
And a big part of it is like you guys don't make anything we want. We like some of your Boeing aircraft, some of your engines, a little bit here and there, but other than that they are just waving in gold and silver. Mhm. And
interestingly, what you described in the 18th century there in the 1760s is what forced England onto a gold standard rather than gold and silver standard
because we lost all our silver to China. And what saved us was Portuguese discovery of gold in Brazil and they Portugal spent all their gold in the UK and so there was an increase in gold supply and that's what made Isaac Newton's gold standard workable.
I I did not know that. That's um so you you can see you know ultimately it's all just a function of price, right? It's it's price or it's volume. And if you have the currency fixed to a unit of account or to a unit of gold, that's a problem.
Yeah. It's it's when I said revaluation, I meant the gold prices going to be officially stamped at a certain price. It's market forces,
right? And so I think those market forces are trade in this system I just described of
the Chinese don't want the only way to balance the trade based on what they want and sort of their
Yeah.
trade which is cultural. It's they've been doing the same thing for 300 years.
So this this becomes what's the perhaps the reason the gold price is only $4,000 is that this is not widely understood what's going on. And once it becomes a bit more explicit then you know once the story is better known then I guess we're talking about a gold price in the tens of thousands.
I agree. I I think that's exactly it. There's still is this is still viewed with a high degree of skepticism which is fascinating to me because you can you know uh Seymour Hirs famously said the biggest stories are sometimes out in the open.
Yeah. And this is right out in the open. You can see six of the last eight months number one export of the United States of America bigger than oil bigger than jet engines bigger than pharmaceutical preparations. Gold useless pet rock gold. The other two months it was the second biggest after pharmaceutical preparations and oil last month.
Um, you can see what the Chinese are doing. You can see what they've been doing. You can see what central banks are doing. You can see the price rising. I mean, if if you and I were sitting down doing this interview even four or five years ago, you you can go ask any any of your contacts in gold four or five years ago, if I would have gone to you and said, "Gold's at 5,500. What's going on outside?" They would be, "Oh, there's zombies walking the street, economic collapse." But and that's been part of it too where gold went to 5500 and the sun came up and the lights came on and the market still worked and there the beauty of gold there's a lot of things that are beautiful about it but the beauty of gold is it's not used for anything. It's ironic. The very thing that most people detract from gold, it's not used for anything,
are why it's so useful as a monetary asset, as a reserve asset. Because look, gold could go to a million and what's going to get hurt. Now, take corn. Take corn to $1,000 a bushel as a reserve asset. What's going to happen? Six billion people are going to starve. Take oil to $1,000 a barrel to make it the reserve asset to back the dollar like we did in the 70s, right? What's going to happen? Hey, the world economy collapses at 150 um as rates surge and what have you. So gold can go up and up and up and it's not hardly used for anything. And so that's why I think whether you look at you know when I talked about the trends we're seeing gold to oil ratio has gone from 13 to 60. Uh gold to treasuries surging stock prices down in gold 30% since 2022. You can see over and over and over. Gold went to 5,000, nothing happened. Gold goes to 10,000,
nothing happened. It's nothing's going to happen. Go to 15,000.
And ultimately, it but what will happen is you're going to rebalance and reorder global trade in a way. What does everybody say they want? Both the Chinese and the Americans. Americans want the Chinese to consume more and produce less. The Chinese want the ability to trade in their own currency. What what gold going to 10,000 does both of those things.
Um, nothing is as useless and as useful at the same time is the quote from Peter Bernstein. Great quote. It's a great quote.
There's so much I want to talk to you about and uh I want to ask you what if you're wrong. For me, it would have to be geopolitical. It would really have to be if either Russia or China or both went through some sort of political crisis catastrophe overthrow. So if I woke up and Putin had been overthrown by Boris Yeltson 2 where he's somebody who's willing to sell off Russian interests to on the cheap to to Western interests uh and red dollarize the whole thing.
Um, I'm going to be wrong. Yeah, I'll be I'll be saying I'm looking to sell gold here. Same thing as if if she was overthrown by some sort of very pro-western interest who was willing to move back to sort of where China was in the late 90s, early 2000s where they really stifle their own domestic interests and uh cater to the US um then I'm going to be wrong, you know, where they start restockping treasuries, etc. Uh I'm going to be wrong. That's what that's what it would take uh in terms of of either of those two things. US US austerity probably the third but I don't think we have to worry about that uh anytime soon
but we we've we've sort of run out of time unfortunately.
Um, so why don't you give your newsletter a nice big plug as we end the show and then yeah do that.
Uh, yeah, if you're interested in learning more about our research product, fft-lc.com for more information about our uh mass market and institutional research product and uh uh you can find me on Twitter axe, sorry, Elon Luke Groman.
Great stuff. And I will put links, you know, in the description. Luke Groman, thank you very much.
Thanks for having me on. It's great to be here.
So this is the bit when I tell you that nothing you hear in this program is intended as investment advice. It is an expression of opinion and only. We don't know your financial circumstances. Do your own research. And if you live in a third world country such as the UK, I recommend you own gold and silver in your portfolio. Without a doubt, the pound is going to be further devalued. And in fact, the same goes for the euro and the US dollar as well. And the bullion dealer I recommend and the bullion dealer I use is the pure gold company. You can buy your gold and silver and have it delivered to you wherever you are in the world. Or they will store it for you in vaults in safe places such as London or Zurich or wherever it may be, but somewhere safe where the powers that be cannot take it from you. So that's the Pure Gold Company and you'll find a link to them in the comments and if you phone them up, tell them I sent you.