Ask The Expert

Ask The Expert - Rob Kirby - May 2021

Ask the Expert with Rob Kirby

 

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One of the smartest minds in the precious metals sector, Toronto-based author and analyst Rob Kirby is a long-time veteran of the financial industry, with many years spent working in institutional trading, fixed income, and derivatives. He is currently the editor of the Kirby Analytics newsletter, and his work can be found at www.kirbyanalytics.com.

This month, Rob answers several of your listener-submitted questions, including: 

  • Is inflation really “transitory”?
  • Will the silver squeeze movement impact pricing long-term?
  • Plus: Can gold go to new all-time highs later this year?

For the answers to these questions and more, listen here:

Man: You are listening to "Ask the Expert" on Sprott Money News.

Craig: Welcome back to the Sprott Money News, sprottmoney.com "Ask the Expert" segment for May 2021. I'm your host Craig Hemke. Joining us this month is a returning guest that many of you know. His name is Rob Kirby, respected analyst, one of the smartest minds in the precious metals sector. You can find his work at kirbyanalytics.com. And it's good to have him join us again here at the Sprott Money News "Ask the Expert." Rob, thank you so much for your time.

Rob: My pleasure, Craig.

Craig: Before we get started, there's just another reminder, that all of this content that you enjoy comes from Sprott Money, whether it's our monthly Precious Metals Projections, the "Weekly Wrap-Up" segments, this "Ask the Expert." Look, if you like us, one, please give us a like on whichever platform you listen to, maybe subscribe to that platform so we can get wider distribution. That helps us get the word out about all these great topics. But also, man, throw us a bone at sprottmoney.com. You're going to find great selection, gold, silver, and platinum, very competitive pricing, and also great storage options if you want to store it safely and securely. Again, sprottmoney.com. If you want to talk to an actual person, you can do that too, (888) 861-0775. Anyway, this is, of course, "Ask the Expert" where we collect questions from all of you over the course of the month and then we lay them on the expert. Rob Kirby is said expert. So Rob, if you're ready, can I hit you with question number one?

Rob: Let's go.

Craig: All right. My friend, here it comes. Lots of talk these days about inflation and everybody at the Fed here in the States keeps calling it transitory, which to me is just another way of jawboning yield curve control to try to convince bond investors to keep buying bonds under 2%. But anyway, a lot of debate. Is inflation permanent? Is it transitory? Are we actually in deflation? What do you think?

Rob: My belief regarding inflation is that it's here to stay and what we are witnessing currently would be referred to in betting terms as jacks for openers. And I believe the inflationary monster is literally just breaking out of the cage right now and it's going to be very hard to get it back in the cage. So I look for a lot more inflation. And Craig, it really, really boils down to the amount of money that's being printed, and I see no let-up in the amount of money being printed. If anything, I believe there will be substantially more money created this year than last year, and that can only end in one place, in my view, and that's higher prices across the board for anything that means anything to anyone.

Craig: You're an economist. I would imagine you know the terms cost-push inflation where input costs push inflation higher, but there's also demand-pull where there's too many dollars chasing too few goods. Sounds like we got both of them.

Rob: Yeah, well, we do but, I mean, look, the powers that be, or let's just say the stewards of the U.S. dollar under the Biden regime and the Democrats, they're very crafty in how they go about their business. With the amount of money being printed and the amount of money that's being let's just say bestowed upon the populace, one would naturally expect, you know, prices or... Look, prices are moving up. Incomes, interestingly, aren't because a lot of people would rather take the government handout than actually go get a job, and there are many job vacancies in America, I know right now, in particular, that can't be filled because people would rather take the government dole than actually go and work for the same amount. So, while it appears that there's very few...let's just say very few people looking for work and demand for workers seems to be high, you see, they've also got the issue on the southern flank or, you know, the U.S.-Mexican border where immigration is...or people are being allowed to traipse into America unabated at numbers that are dizzying which tends to suppress wages or suppress real incomes.

So the point I'm trying to make, if any, is that while money is being printed, there hasn't to date or maybe until just now, there really hasn't been any great push on pushing incomes higher, but now we have started to notice. Like I've heard stories of McDonald's paying people $100 just to show up and do an interview or to fill out an application form, and offering people increased entry wages because they're short of people because there are a lot of people sitting at home who don't want to work because they're getting a free government handout. So maybe a bit of a transitory position on that front, but up until now, there's been very little pressure to push wages higher. Money printing continues unabated. And the other thing that I think is incredibly misunderstood by most of the economics community, the amount of money that is being printed, Craig, is not reported accurately. And to substantiate that claim, I look at the work of Dr. Mark Skidmore and his latest work involving a study of the funds being managed under the Social Security Trust umbrella where they have roughly $400 billion in assets, investable assets, and these are retirement assets, and yet the turnover on that $400 billion is, using government data, is in the neighborhood of $44 trillion a year. And that is a neon sign for fraud in my books. So, that venue, in my view, is being used to create an awful lot more money than would be indicated let's say by the growth in the balance sheet of the Federal Reserve. A lot of conflicting things happening all at once.

Craig: It definitely leads to our next question, which I mean is about the Canadian dollar, but by extension, I guess, that's about the dollar, so I would like you to expand on that. The Canadian dollar has recently hit a multi-year high against the U.S. dollar. Will that continue? And then maybe you can just address the dollar a little further.

Rob: My view on the Canadian dollar with Justin Castro at the controls, I'm sorry. I can't help. I mean, the guy is a dead ringer, the guy is a dead ringer for Fidel Castro at the same age. And I mean, the pictures are bountiful. If one does a picture search with any search engine, the similarities are very, very striking. Justin Trudeau looks nothing like his father, looks everything like a young Castro. And my attitude there is even if you don't want to believe that he's truly Justin Castro, he is at least known by Justin Trudeau and the monetary policies of the Liberal Party will ensure that the dollars...let's just say lofty, lofty perch, at this point, won't be continued very long in the future. The Canadian federal government along with the provincial governments in Canada are financial basket cases and why our dollar has appreciated this much against the U.S. dollar is probably a sad commentary on the U.S. dollar, and not because we deserve to be cast in a much better light. I mean, the federal deficit in Canada, and the rule of thumb is the Canadian economy is 1/10 the size of the U.S. economy. The Canadian federal deficit this year was, call it $350 billion Canadian dollars if we're rounding off to round numbers. That would translate into an official federal debt in America for the year of $3.5 trillion using, you know, the axiom of 1/10. And officially, I don't believe U.S. government deficit for the year was $3.5 trillion. So we've maybe fared worse, but our currency, for some reason, and, you know, it's a good guess as to why, but I don't believe it continues.

Craig: Let's go on to question three because this one I'm excited to get your thoughts on this. You've followed the digital derivative markets and the Colmex pricing system and everything else for years. We've now got the silver squeeze movement of folks really around the world taking physical delivery of silver trying to kind of de-leverage the system or force the de-leverage of the system. What do you think? Will that have any impact on the pricing system long-term?

Rob: Could it and should it? Yes. Has it and will it? I don't know yet. The problem with metals in my view is that we have regulators that don't regulate, so until the regulatory regimes in the U.S. and I guess technically, possibly, and dictates from the BIS, the Bank for International Settlements, and precious metals trading at the London Bullion Market Association, until regulators start enforcing existing commodities law and applying it in a fair and just manner in the precious metals arena, I just don't see how metals can do what they're supposed to do. I look at it this way, Craig, cryptocurrencies are only doing what precious metals have been prevented from doing, and physical precious metals are the ultimate in bedrock safety in the financial world, but they have not been allowed to perform their historic function in the wake of or in the face of rancid monetary debasement. They have not been allowed to perform as they otherwise would have because regulatory regimes are involved in the fraud and it is fraud.

Craig: Well, I think that's a pretty good segue to the next question. You can just kind of pick it up from there because there's been a lot of talk lately, just even the last couple of weeks, about this provision of Basel III called the net stable funding ratio, which is something that...a requirement, I'm sorry, net stable funding requirement, which is something that's due to be, I guess, enforced, if you want to call it that, at the end of June. The LBMA is doing everything they can to wriggle out of this deal because of what this would require if it's actually put in force in June of 28th. And so, there you go. Here is your question, will this net stable funding requirement have any impact on price by the time we get to the end of next month?

Rob: Well, my view on that is, you know, we spoke about this briefly in the pre-interview, and I was actually asked directly about this yesterday what my thoughts were on the likelihood of Basel III guidelines creating a real issue in the precious metals arena. And my answer yesterday to this question was if Basel III guidelines as stipulated currently are actually enforced, it would be tantamount to a dog chewing its own tail off in that the keepers, the crypt keepers, the banks that are at the heart of the LBMA, and the banks that are at the heart of the precious metals suppression schemes, and, you know, there's a host of names that we could throw out there in the banking community, if they're actually enforcing the Basel III agreements, it would be highly, highly destructive to our current financial universe as we have known it because effectively would mean that banks that have sold unallocated gold and the...let's just say probably 95% or greater of the volumes that are transacted on LBMA and the same percentages on Colmex are unallocated. And the institution of these Basel III agreements or guidelines would mean that the unallocated business basically would dry up. Well, that would create havoc in the financial universe, and my view is that exemptions will be granted or existing players will be grandfathered. These kinds of exemptions, there's history where this kind of exemptions and I'll cite one, in 1934 when America confiscated gold, there was a law that was passed which allowed the executive branch in the United States, namely the President, to grant companies a pass or an exemption from having to report their true financial condition if it was in the name of national security. We live in a world where exemptions like this occur, and where they are granted. You see, always though you have to be able to wrap yourself in the flag to even be considered for such an exemption. And my view is that with Basel III, the current structure of our capital markets would be at risk if certain players weren't granted exemptions. And I don't expect these exemptions to be highly publicized, but I do expect that there will be exemptions because the alternative could be very disorderly markets.

Craig: Yeah. Certainly logical to think that. Why wouldn't they? Because you're right. You haven't seen a dog eat its own tail before. I've got two questions to go, Rob, so we are two-thirds of the way home. As we record this, we're about a month away from the June FOMC meeting. You know, the financial press, the 24-hour news cycle keep badgering Chairman Powell. You got to announce a QE. When are you going to announce a QE taper? When are you going to announce it? You know, and he keeps saying...I think the last time he said, "We're not even thinking about talking about it." Nonetheless, that's going to be all the rage in the next month. Do you expect the Fed to announce any kind of taper to their existing QE program anytime this summer?

Rob: Well, I mean, we are seeing measurable inflation. Numbers that were just published this morning are indicative of inflation running ahead of estimates. What do we expect Jay Powell to do? He'll probably try to emulate or do much of what Alan Greenspan used to do, speak a few words with saying very little. We might be in a time or in a space to consider tapering but it will all be data-dependent. It'll basically be fluff. I don't expect rates to rise. At least I don't expect the Fed funds rate to be increased. The bond market may react. We might see 10-year yields pop up another 10 points, but they have the ability to rein in the long-end of the curve with interest rate derivatives at any time of their choosing. So, no, I believe interest rates are pretty much stuck in a rut for the foreseeable future.

Craig: Well, that probably helps us with the final question then, Rob, because if inflation is rising and interest rates are stable, that means we're going sharper negative on real rates. You've discussed the dollar, what you think there, and inflation. You discussed Basel III. So the final question is, and this is a nice, straightforward one, can gold go to new all-time highs later this year?

Rob: It should. But what concerns me about it, Craig, you see, in my view, it's inevitable that gold and silver will go up. When the shackles are finally removed from gold and silver pricing, in my view, as they inevitably will, if you're not long, I don't believe you will get any. And I do believe it will be like literally throwing a switch. And so, what I'm saying is, at some point, the price of precious metals will look like Bitcoin on steroids, but until that happens with the current regulatory regime, I don't see much of anything happen or happening, but you got to be there because when it does happen, it's too late. Procuring physical metal will be a lesson in futility at some point in time and you will get none.

Craig: As you give your answer, I'm thinking of the operative word in that entire question is not "will gold go," it is "can gold go" to new all-time highs, right?

Rob: Well, it must. It's really a timing thing. You've got to be long before the barn doors are open because once the barn doors are open, you won't get any, so you've got to be long.

Craig: Rob, before we wrap up, tell everybody about your day job. What is Kirby Analytics?

Rob: Kirby Analytics is...I don't know. At this point, you know, I'm wondering, Craig, if it's an infectious disease that I've acquired because, you see, years ago, I got into this from the standpoint of knowing how interest rate derivatives work because I was engaged in their trade for about 12 years. When I became aware or highly sensitized to the size of derivatives positions by banks, you know, in the early 2000s that banks had books, JP Morgan's book. I think the first time I really became aware of how big their book was, it was $35 trillion and notional. And I know what's involved in building a book, and those numbers are insane, staggeringly large, and the free marketplace and the interbank markets do not allow for positions to become that big, and that is indicative that there's bigger hands at play, namely, sovereigns are involved. And in the case of the interest rate derivatives market, one of the biggest, and I don't even want to say "one of the," the biggest player undeclared has to be the U.S. Treasury and specifically it's the Exchange Stabilization Fund in the U.S. Treasury. So that's how I come about getting into this, and Kirby Analytics is basically an exercise in forensic economics, identifying and documenting the trade in these instruments. Interest rate derivatives is highly, highly suppressive to interest rates, and is the reason why we have zero interest rates in a world where we have inflation off the charts. And as you mentioned just a little bit earlier, we have negative real rates. I like to explain to people why, all by force.

Craig: Well, and again, with that understanding, it makes it even more clear that if they want to keep rates down, they will, and that if they want to inflate away the debt with negative real rates, they will. And that almost inevitably is about the closest correlation that gold prices have is negative real interest rates.

Rob: Hear, hear.

Craig: Well, again, we've been speaking with Rob Kirby. Folks, especially in Canada, they know Rob Kirby, and kirbyanalytics.com is where you can find his stuff. And again, any other physical stuff that you need, you can find at sprottmoney.com, gold, silver, platinum, rounds, bars, coins, storage options as well. Check it out, sprottmoney.com, and again, that phone number (888) 861-0775. Again, Rob Kirby, thank you so much for your time. I really appreciate it.

Rob: And my pleasure.

Craig: And from all of us at Sprott Money News and sprottmoney.com, thanks for listening. We'll have another "Ask the Expert" in June.

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About the Author

Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities.

Since 2010, he has been the editor and publisher of the TF Metals Report found at TFMetalsReport.com, an online community for precious metal investors.

*The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.

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