All You Need To Know About The Bid Underlying Gold

Craig: Hello again from Sprott Money and sprottmoney.com. It is now July, 2024. It's time for your "Ask the Expert" segment. That's the podcast we post once a month, where we bring in an expert in either the economy, precious metals, geopolitics, you name it, to get their opinion of where things stand. We've had quite an interesting, at least, month of June, and now into July with economic data. So I thought, "Well, who better to bring back is then Peter Boockvar. Peter, of course, is chief investment officer of the Bleakley Financial Group. He's also an author. You can find his Substack, that he calls "The Boock Report," and I'll have him tell you how to find that and sign up for that, if you wanna stay on top of these things. Anyway, it's great to have Peter, and Peter, thank you so much for spending some time.

Peter: I appreciate having me on.

Craig: Hey, and before we get started, as usual, I just wanna remind everybody to thank Sprott Money for this content. You get this all month long, for free, on YouTube, or wherever you listen to your podcasts. So, make sure you thank them, and right now, if you go to Sprott Money, you can actually save some dollars by referring a friend, up to 500 bucks towards your next purchase if you refer a friend. So, hey, there's a way you can actually add to your stack for free. So, go to sprottmoney.com and check it out, or give them a call at 888-861-0775. Peter, before we get started, tell everybody a little bit about your job, and then "The Boock Report."

Peter: Well, on the Bleakley side, as the CIO, I managed two portfolios, one a global macro, and one an income-focused one, and also lead the investment committee in helping our advisors create investment portfolios for their clients. And then, with "The Boock Report," I comment daily on macroeconomic and market-moving things that are going on. And I'll reveal things that we happen to be long, and just anything that's of relevance that could impact that particular day.

Craig: And make sure people know, we're not talking just gold and silver stuff. I mean, this is macro themes that you write about. And at Substack, how do people find it? Just type in "The Boock Report?"

Peter: Yeah. They can just type in my name, and they'll find access to it, and they can trial it. But yes, it's comments, market-wise, on equities, fixed income, commodities, currencies, talking about monetary policy around the world, growth around the world, and anything that I find of interest that's market-moving and economic impactful.

Craig: Well, all right. Let's dive right into those things that you find of interest. As I was thinking about who to have in as an expert this month, I thought I gotta have somebody that can deal with the macro, and talk about economics, because again, this is all gonna trickle down to monetary policy, and the impact on the dollar and the precious metals and the like. Really beginning, maybe it was May, at least certainly in June, there was kind of this acceleration of, call it negative surprises, you know, like the Bloomberg Surprise Index, or the Citi Surprise, Economic Surprise Index. They've all just been doing one of these deals. What do you make of this? Are we finally starting to see the impact of not such a soft landing, more of a hard landing kind of thing?

Peter: Well, going from an expansion to a downturn, the softness comes in the middle. So, the whole concept of soft landing was somewhat nebulous in terms of what it actually meant. The economy is extremely mixed, in all different areas. The consumer is mixed. We have the higher-income consumer doing better than the lower to middle-income consumer, that is much more stretched with their budgets, value-seeking in what they buy, focusing more on the needs rather than the wants. I think most relevant over the past month has been the softening in the labor market. We've seen slackening of demand, with drop in job openings, elevated continuing claims. Now we're seeing a rise in initial jobless claims. We're seeing, outside of government, healthcare, and leisure and hospitality jobs, very little job growth elsewhere. So, I think overall, combining that with the Fed telling us that they are now sort of evenly focused on the employment mandate, in addition to inflation, that has raised the prospects of the Fed cutting interest rates in September. In fact, the rate cut odds for that September meeting are not just 100%, but there's a 12% chance that we get a second cut by September. Now, whether that means 50 basis points in September, where maybe they surprise us with one in July, which I don't think they'll do, the Fed is now headed to some rate cuts.

But the big question is, is this gonna be your typical rate cutting cycle, where the economy rolls over, and the Fed just slashes and burns rates? Or is the still-elevated level of inflation going to limit their ability to counteract any economic downturns? And I think the latter is the case. Inflation's definitely moderating. It will continue to moderate in the back half of this year, but I don't think that it stays down, because there's one thing to have inflation spike, have it fall. I'm not in the camp that it just magically goes to 2% and then stays there. I think we're in a more sustainable 3% to 4% inflation rate, looking out over the next three to five years, rather than the 1% to 2% that we got so accustomed to pre-2022.

Craig: What do you think, Peter, that does the bond yields? You know, if inflation never comes down, and we stay up there in that 3% or 4%, and the Fed might try to massage things on the short side, but man, that long end stays up, that brings into all kinds of problems, like financing the existing debt. I mean, does eventually this kind of lead to, like, a yield curve control-type plan, maybe?

Peter: Well, that possibility is much further out. In the meantime, we're beginning to see the curve disinvert, and that's because long rates, obviously, remaining more sticky to the upside, while the market's trying to believe and hope that the Fed cuts short-term interest rates. But that's an important thing, because if the Fed cuts short-term interest rates, but long-term interest rates don't want to accommodate by going lower, because they feel that maybe the Fed's backing off from their inflation fight when we have these other secular trends that are gonna keep inflation higher, then yeah, maybe we get actual rise in long-term interest rates as the Fed cuts short-term interest rates, which would be a bear steepener, and...

Craig: Yeah.

Peter: ...we'd really be better off. I'm not so sure. So, that's why I think that this is gonna be unlike previous rate cutting cycles. I think the Fed's gonna be much more limited in their flexibility. I mean, keep in mind, when inflation was running 1% to 2%, not just in the U.S. but globally, central bankers used that as an excuse and license to do whatever they wanted in terms of their monetary experimentations, in response to any economic downturn, and in some parts, the desire to have higher inflation, which, unfortunately, they got what they wished for. But this time around, I think it's gonna be much more nuanced. I mean, look at the ECB, which cut interest rates, but, they made it a point to say, "This is not just the beginning of a succession of rate cuts. For now, it's one and done, and maybe or maybe not, we'll cut again." So, I think that's sort of just a sign of what all central bankers are gonna have to deal with. And in fact, the BOJ is gonna be raising rates in a couple weeks, in addition to cutting QE, so they're going to be going in the other direction.

Overall, and to your question and point, is that yes, I do believe that higher for longer in interest rates, and even if the Fed cuts short-term interest rates, they'll be higher than they've been for a while, I think that's not just an overused cliche. I think it's real. Now, historically speaking, interest rates are not very high. But what makes them notable at current levels is they're much higher than the zero rates we had in the 15 years leading into 2022. And that's where the sort of transition phase is currently underway, because so much debt was priced at those artificially low levels that every day, every week, every month, every quarter, every year is now repricing at much higher levels, again, not high historically, but much higher than we got sort of medicated on for 15 years.

Craig: Do you think then the end game, end result, economically, is a recession? And then, would it be longer? Could it be deeper than what people are forecasting?

Peter: So, I've been most worried about more of a death by a thousand cuts type situation of the economy, responding to higher interest rates, because not everyone is immediately impacted by higher interest rates.

Craig: Right.

Peter: The Fed starts raising rates in March 2022. If you are in real estate, but didn't have a loan coming due until November 2024, well, you were not necessarily impacted by that. But if you had floating-rate debt, you were immediately impacted, and each succession of interest rate increases, it hurt you even more. So, now I think we're well into this repricing, in terms of legacy debt that's gonna reprice to the new rate environment. That still has years to come. So, I still am focused on that, and worried about how that's gonna impact in the economy. Now, whether it's gonna be a sharp recession or not, I think a lot of that will have to do with where the stock market goes. And I say that because it seems that the higher-income consumer, and a lot of government spending, is literally holding the U.S. economy on its shoulders. So, if you got an economic downturn, if you got the Fed cutting interest rates, that would then clip interest income for a lot of savers that have been benefiting from higher interest rates. Then you're talking about possibly a harder landing. If the S&P 500's 3500 again, or 3000, you can be sure that the higher-income consumer is probably not spending at the same rate, considering that a lot of baby boomers still have a lot of money in the stock market, and a market pullback would certainly impact their potential retirement. So, to me, that's sort of the trigger on whether it's gonna be a moderate downturn or something that is harsher. And, you know, unless you can predict the stock market from here, you know, that's a scenario, or a potential outcome that remains to be seen.

Craig: Yeah. A little bit of a reverse wealth effect, in a sense, driving the economy.

Peter: Correct.

Craig: All right. Well, I don't wanna try to predict the stock market, but hey, let's do it for fun, Peter. I had, I don't know if you know who Michael Oliver is. He's a Wall Street veteran, you know, with...

Peter: Yeah.

Craig: ...a technical and momentum analysis. And he's pretty concerned about a, not a crash, per se, but more of a contracting stock market that begins here in the third quarter. In your work, macro, and advising the portfolios you help manage, are you concerned about the stock market? What are your thoughts in the back half of this year?

Peter: Well, as a long-term student of history and markets, and doing this for long enough, I know that a healthy market is when it's broad, and an unhealthy market is when it's very concentrated. And I know that's fodder for technical analysts, but it's also important for fundamental analysts to sort of reconcile. Now NVIDIA, to use that as an example, is sort of in its own ecosystem, because they're selling chips to, you know, the top big names, of Microsoft and Apple and, well, not necessarily Apple, but... Less of them. Microsoft, Google, Amazon, and Meta, which is almost half of their revenue. So, irrespective of what's happening with the rest of the economy, as long as those companies are spending a lot of money on their AI build-out, they're gonna buy NVIDIA chips.

But, if the lower to middle-income consumer is really stretched, are they gonna go out and upgrade to the new Apple iPhone because it has a souped-up Siri? If small and medium-sized businesses are struggling with the current economic environment and the high cost of capital, are they gonna be advertising to the same extent on Instagram and Facebook and YouTube and Google Ads? I'm not so sure. I mean, we'll see. We'll see what earnings are like. If small and medium-sized businesses are slowing the pace of their hiring, is Microsoft gonna sell...is their growth rate of new seats of software and services gonna grow to the same extent? I'm not sure. And something that I've said before is that those companies still breathe the same economic air as the rest of us. And if GDP growth in the U.S. is gonna, is slowing to, like, 1.5%, which I think it is, those big companies are gonna get impacted too. Now, I don't know which quarter is reflective of that. We'll see what they have to say in the next couple weeks. But I think investors are making a mistake in thinking that, you know, their economic world is different than the rest of us. Now, of course, we hope that the economy can stabilize or rebound, and that small, medium-sized businesses can do better. And we've already seen an uptick in the Russell 2000, so maybe that's a precursor to that. Maybe. Rather than just a sort of a temporary catch-up trade that's not gonna follow through. But my point is is that these two sort of markets, with the big names and everything else, and then two different economies, we all have to, as I said, reconcile this. And I think earnings will help us move in that direction.

Craig: In the end, a kind of chicken-and-egg kind of thing. Does the economy go down, which pulls the market down, or does the market go down, which exacerbates the economy going down?

Peter: Well, I think first you'll have the economy continue to weaken, and then that eventually clips earnings. And at some point, people are gonna realize that the Fed is not gonna be able to save the world this time.

Craig: Yeah.

Peter: And then that could negatively impact PE multiples. I say that because that's been the main driver of earnings, I'm sorry, of stock prices over the past couple years. So, if you get an economic downturn, a slowdown in earnings, and then some contraction in PE multiples, you know, that is a cocktail for a more challenging time. Not saying that's gonna happen, but it's, as a portfolio manager and the steward of other people's money, and always watching my back, those are the things that I have to watch out for.

Craig: Sure. Peter, one last question. You're certainly more agnostic, I'm sure, about gold than I am. But in times like this...

Peter: Well, I'm not agnostic. We are very long, and very bullish.

Craig: All right. Awesome. Well, that's what I wanted to ask you. Where do you see, in a, you know, balanced portfolio, with the macro view that you have, where does gold fit in?

Peter: Well, I have made it a point for our clients and our advisors, as overseeing their clients, is to be long gold and silver. And we remain. Now, the allocations vary by client, but at least in my global macro strategy, I'm heavily weighted, almost 20%. So, I have a pretty chunky position, and that's because I'm bullish. And the performance of gold, and we all know why, for those that are watching this, and that's because of the voracious appetite of central banks buying gold, the way that gold has traded, beginning in 2022, in the face of a 450-basis-point increase in real rates, and strength in the dollar, and now it's finally getting the tailwind of potentially lower interest rates, to me, that tells you all you need to know about the bid underlying gold. And then, at some point, you throw in the Western buyers, that will chase price higher, and there's a lot of upside. There's potentially even more upside in silver, just because it's so far still below its highs, and relative to the price of gold, still undervalued, I believe. But to me, they show a lot of upside, and there's a lot of different macro scenarios that you can map out that will be more positive for gold and silver, rather than negative.

Craig: Yeah, and I agree with you on that. And it's certainly going to be an interesting back half of the year. Especially as we begin the back half-year, there's so much uncertainty out there. But you've certainly cleared up some of that, Peter, and I very much appreciate it. Again, Peter Boockvar is the chief investment officer of the Bleakley Financial Group. Again, Peter, the Substack can be found under your name, or do they look up "The Boock Report?" How do they...?

Peter: Yeah, they can just Google my name, or "The Boock Report," with B-O-O-C-K, report, and it'll pop up.

Craig: Awesome. Well, thank you very much for your time, Peter. It's always enlightening, and very helpful to visit with you. I know everybody watching appreciates it, and hey, just one thing for everybody watching. If you appreciate it, make sure you like or subscribe, on whatever channel you're watching, to the Sprott Money channel, because there's gonna be more content as we go through this month, then obviously into August and beyond, and you don't wanna miss any of it. So, make sure you hit that like button, hit that subscribe button, so that you're notified every time there's some new content. Again, thank you, Peter Boockvar, for joining us. This has been fantastic. And please, everybody, keep an eye on the Sprott Money page, and we'll have more interesting content for you here later on in July.