Price of Gold Analysis with Brent Johnson

Craig: Hello again, from Sprott Money News at sprottmoney.com. It is now late November, if you can believe that, 2023. It is time for your monthly wrap-up. I'm your host, Craig Hemke. Joining me this month, my old friend Brent Johnson. Brent is the CEO of Santiago Capital, which is a wealth management firm, now based in Puerto Rico. And we may ask him about that if we get a chance. But like I said, Brent's an old friend, and definitely knows his way around the markets. It's a pleasure to get the chance to visit with him. Brent, good to see you.

Brent: Yeah. Thanks for having me. Happy to talk to you again.

Craig: All kinds of fun stuff to discuss. And all kinds of fun stuff at Sprott Money this month. We are now officially in the holiday season. American Thanksgiving is behind us. That means it's time for the holiday bullion sale at Sprott Money. Go there, check it out. You'll find all kinds of unique items, and on-sale items, all the way through the middle part of the month. And I'll add one more thing. I write a column every week for Sprott Money. If you go to the Insights tab and click on that, and scroll down, you'll find my latest. I actually wrote my own little Christmas article yesterday, where I listed, hey, let's call it "give the gift of sound money," not only the coins themselves, but you gotta educate people as well. I listed out my ten favorite books regarding sound money, and what I call the end of the great Keynesian experiment. Give somebody a book. Goes a lot...lasts a lot longer than a gift card, I can tell you that. So, anyway, go to sprottmoney.com, and you can see that list. Brent, have you written any books?

Brent: No, but I've toyed around with the idea, and talked to a few people about it, but as of now, the answer's no.

Craig: I've had this on my desk for about 10 years. That's as close as I've gotten. Call it the tyranny of the urgent, my friend. It's always something that's distracting. All right. So, let's talk about the month of November. I just can't believe that we're already this close to the end of the year. It's been quite the month, though. As the month began, a lot of stuff was kind of being...a lot of capital being extracted, it seems. The S&P was down, gold was down, silver was down. But now here we are, four weeks later. S&P's up something like 300 points on the month. Of course, driven by maybe only seven or eight stocks. You know, gold's up substantially. Silver is up 15%. What, in your view, has turned everything around?

Brent: Well, I think a lot of it is interest rate expectations from the Fed. And, you know, markets generally trade on expectations. And, you know, last year, as the Fed was hiking aggressively, people were expecting rates to continue to go higher, and so markets kind of sold off on that news. And then this year, they've kind of expected the rate cuts...or, sorry, the rate hikes to stop. And then, what's been kind of interesting is, at the September Fed meeting, the Fed kind of threw cold water on that idea. They took away the expected rate cuts. They said, "We may have more rate hikes," and so, September, and even into October, or at least, or, kind of into the [inaudible 00:03:16] October... Sorry. Late September into the end of October, you know, markets sold off pretty hard. Gold sold off, the equities sold off, you know, bonds sold off.

But then, we have the Fed meeting in November, first week of November, and Powell kind of said the same thing. I don't think he really changed his tune, except for he had many chances to say...he had many chances to be hawkish, and he didn't. I wouldn't say he was dovish, but he had many chances to be hawkish, and was not hawkish. And then we've had a lot of dovish data, because he said, "We're data-dependent." And so, the interest rate expectations is that there will be no more hikes, and it won't be too long before interest rate cuts start happening. And once that kind of... And everything had gotten kind of oversold. You know, gold got oversold, the miners got oversold, equities got oversold in the end of October. And so, then, you know, there was...and the short interest got high in stocks. And so, we basically had a short squeeze. I mean, it's probably the best way to say it, over the last 30 days, and, you know, equities are up 10%, the miners are up 10%, or 15%, gold is up 10%, silver's up 15%.

So, to me... And the dollar, over that time period, the dollar's down 3% or 4%. And so, you know, we've been talking a long time, and you know I follow the dollar very closely. And the reason I follow the dollar is, what interest rates do affect the dollar greatly, and what the dollar does affects basically every market in the world greatly. And so, as we've seen dollar weakness, we've seen asset strength. And so, I think that's what... The market is front-running the expectation that there will be no more Fed rate hikes, and that there will be Fed rate cuts, you know, come spring or summer. And so, they're trying to get ahead of that reality.

Craig: On that theme, that leads me to ask you something that's been...that I've talked about a lot over the last couple of weeks, and I'm sure has got your attention too. You know, there's this long-running correlation between gold prices and real interest rates. You know, people always talk about, "Well, gold's not following inflation." [inaudible 00:05:33] getting half the story. It's not just stated inflation. It's real interest rates, you know, your nominal rate minus your rate of inflation. And, you know, they track like this, and then all of a sudden, over the last year and a half, they've widened out like that, and people are like, you know, "What's going on here?" Is it as simple as, kind of, a fear of missing out? The future rate cut expectations that kept gold from going down? Or what do you think has widened that gap?

Brent: I think a few things. I think, for most of the year, despite real rates continuing to rise, gold held up very well...

Craig: Right.

Brent: ...through September. And I think that was partly because there was an expectation that real rates were gonna fall because interest rates were going to fall. But then I also think it's partly due to the fact that as we go forward in time, I just think there's a growing awareness that this whole fiat game, debt-based monetary system is in trouble. And not just the United States, the whole world.

Craig: Right.

Brent: And even though the dollar's been strong over the last couple years, the rest of the world's currencies have been really weak. And so there's been great demand from the rest of the world for gold. Not because of the dollar, but because of their own currencies are horrible currencies. So, I think a combination of international demand, expectations for interest rates to come down, and then, you know, just all fiat in general getting debased... Because, again, we've talked about this many times. The DXY index, the dollar index, can rise while it's also getting debased at the same time...

Craig: Yeah. Yeah.

Brent: ...because the DXY is a relative measure, right? And so I think it's kind of a combination of those. And I think that kind of was proven in September, because in September, real rates rose again. Or they rose a lot, and that's when gold took a hit, is when... Because I think the markets kind of had a short-term come-to-Jesus moment that, "Oh, my gosh. Interest rates might not be falling. They might actually be going higher." That means real rates are higher, so then gold sold off. But then as soon as Powell came out and was dovish again, or the market interpreted it as dovish, you know, real rates fell, and gold made up all that ground that it lost extremely quickly. And so, now we're back, you know, equities are at their highs of the year. Gold's at it's of the year. The miners are at the high of the...I think the miners are at their high of the year. I think the miners are... I think gold's up 10%...

Craig: Ten percent. Yeah.

Brent: ...for the year.

Craig: Yeah.

Brent: But I think the miners are up 5%, so I don't think they're up as much as gold. Maybe I'm wrong on that.

Craig: Yeah, yeah, yeah. They're definitely less. Definitely less.

Brent: But if you look at across the board, equities, gold, miners, silver, oil, a month ago, they were either up a little bit, with the exception of the magnificent seven equities, the Dow was basically up 1% or 2% for the year, the Russell 2000 was down for the year, the S&P was up a few percent for the year, gold was flat for the year, the miners, I think, were down 10% for the year. But just in literally 30 days, everything has rocketed back higher. And so, my personal opinion is that everything has moved in the right direction, but it's also my opinion that everything has gotten way ahead of itself. So, it's not that I disagree with the move or the direction of the move. But I think the magnitude of the move, across all of these different asset classes, has gotten a little bit ahead of itself, because while I don't think that there probably will be any more rate hikes, I'm not so sure we're gonna get these Fed cuts as soon as the market seems to think that we're going to, unless we have some kind of a crisis or a liquidity event. If we have some kind of a crisis or a liquidity event, then we will absolutely get cuts, or QE, or some kind of a bailout, or whatever it is. But assuming that we don't... And but, and if that's happening, then I would think that these prices would be lower, as a result of the crisis.

So, I kind of feel like, you know...I don't wanna come out and say I'm bearish on everything, because I don't know that we're gonna have this giant crash. I just don't think that we're gonna continue to rocket up at the pace we have for the last 30 days for the next three months. I think that's pretty unlikely.

Craig: Well, then let's use that as a segue to flip the calendar a month. We're soon gonna be in December. We'll get another full round of economic indicators. The jobs report'll be out a week from this coming Friday, the first Friday of the month. Well the first Friday of the month's the 1st. It's not gonna be the first. It'll be the 8th. Regardless, the next Fed meeting is now two weeks away. How do you envision this year ending? Kind of, some sideways action through the month of December, or...how does it look?

Brent: I think we're probably sideways to down, kind of across asset classes, between now and the end of the year. And here's the reason. If we stay at these levels, and we don't pull back over the... Let's say we just stay at these levels up into the Fed meeting. Or even up into the CPI release, which is, I think is also the second week of December. There's really no reason for Powell to come out and be dovish if everything's already back at their all-time high, right? In other words, a lot... I constantly talk to people who keep saying that there's no way that they can pull off this soft landing. But yet the market keeps front-running everything so much that they're actually giving Powell his soft landing, right?

Craig: Right.

Brent: And so, to me, it's a little bit of cognitive dissonance between what the markets are doing and what people are saying. So, again, I don't know that we're necessarily gonna have this big crash in the next three or four months, but I also would be surprised if we have, you know, another 10% to 20% move across asset classes between now and let's just call it the first quarter.

Craig: Yeah.

Brent: It's possible. Now, here's the thing I would say, is if Powell does come out and is dovish in December, and he indicates that cuts are...or, hikes are gone, and that, you know, maybe there'll be a cut sometime in late spring or early summer, then we could have kind of a melt-up for two or three months. But the problem with doing that then is then we are back at astronomical levels across everything. And it's hard to see... And at that level, why would he have to... Again, the more the market, these prices go up, the less inclination he has to cut. In other words, the reason he would have to cut is if the market was slowing, and if the economy was slowing, and asset prices were coming down. If asset prices are going up, there's no reason at all for him to cut, because that would just endanger inflation picking back up again, or starting to rise again, and that causes all kinds of problems for him, both from a career perspective, from a political perspective. And so, I don't see that... I don't think cuts happen unless we have some kind of a market correction. And as of right now, you know, markets are pretty close to their all-time high.

Craig: Yeah. What do you make of that reverse repo balance? You know, that was always at zero, you get these little spikes of a couple hundred billion dollars, that, like, that's nothing. At the end of the quarter, for a little bank window dressing, that kind of stuff. All of a sudden, after all that QE cash out of COVID, it got to, what, like, $2.3 trillion?

Brent: Yeah.

Craig: Again, kind of, excess bank reserves that are kind of being quarantined at the Fed. That's been bleeding out all year, and we're down to, what, $850 billion or something. Do you think...is that kind of a, I don't know, slush fund, in a sense, providing liquidity, and [crosstalk 00:13:30]

Brent: Yeah, it's just another tool that the Fed can use to try to engender, to keep interest rates where they want them, and to keep assets where they want them, and to try to engineer this soft landing. Now, the one thing that I will say to people is that I never say never on anything. I've been around long enough to know that nothing is impossible. So, I am not gonna sit here and say it's impossible that the Fed pulls off a soft landing. I think it's unlikely, but it's not impossible. And if you do think it's impossible, just go back to 2020, right? When we were in the midst of the COVID, and didn't think there's any way that markets are gonna go back to their highs. And then they did, right?

Craig: Yeah.

Brent: Or a year and a half ago, when, the summer of 2022, when, you know, we had this high inflation, and interest rates were going higher. Who thought that equities were...and, you know, the NASDAQ was down 40%. Who thought the NASDAQ would be back at its high a year and a half later, but it is. And so, you know, and, you know, we could go back to 2008, or 2000, and say, you know, "Gold has to be at $5000 by now."

Craig: Yeah.

Brent: But it's not, right?

Craig: Yeah.

Brent: It's still at $2000. And so, you know, I don't tend to try to give too many recommendations on shows like this, because, you know, advice is kind of individual-specific, but as a general rule, I would say don't take anything off the table. Anything is possible. And, you know, try to keep an open mind as much as possible, and this goes back to your question about the reverse repos. You know, the Fed has a number of tools that they can use to kind of try to "get their way." And I have, you know, I've heard a lot of times, "The Fed is out of bullets. There's nothing else the central banks can do." And I would caution people against believing that. There are so many things these guys can do, these guys and girls can do.

Craig: Yeah. Yeah.

Brent: There's so many different tools, there's so many different little programs. There's so many buttons and strings they can push and pull. And so, again, I'm not saying bet everything that they're right, and I think you should in fact have insurance against them being wrong, but just, they've proven time and time again their ability to kick this can down the road, and so, I wouldn't say they couldn't do it anymore.

Craig: But, like, yeah, like that, you getting, banks start getting in trouble, you know, with unrealized losses in March. "Hey, we'll create this term funding program, and you can just park..." But if that reverse repo goes to zero, which is [inaudible 00:15:50] trending that way, does the Fed have to come up with some other way of flushing liquidity, or getting liquidity out, [crosstalk 00:15:57]

Brent: Potentially. Yeah, potentially. Potentially they do. And again, I think...my guess is they've already got some kind of plans in the works. Again, on the one hand, I think they just kind of make it up as they go, but I'm not somebody who thinks these central bankers are stupid. You know, there's the group out there who thinks they're just a bunch of morons, and they're just, you know, playing it by ear. And then there's others who think that they're these evil geniuses, and I think it's kind of somewhere in between. I think they may be misguided. I think they're arrogant. I think maybe they have a higher belief in their abilities than reality shows, but I don't think they're stupid. Right? And so, you know, I... And that's why I say, you know, never, never...you know, that saying, "Don't fight the Fed," is there for a reason, because people much more successful and smarter than me have tried to take them on and lost, time and time again. Now, it doesn't mean they'll always lose, and there's always a first time for everything. But, you know, the Fed is the biggest player in the world, bar none. And so, you know, they are the big stack at the table. So, it's not that you can't beat them, but you better have a very, very good hand if you're going to.

Craig: Right, right. All right. Well, in our final minutes, Brent, you have been...we've known each other for probably over a decade, and you have been a sound money and gold advocate, really, probably your, almost your whole professional life. Where do you see gold going forward? Are you confident in higher prices, given everything that's going on, the exploding debts and deficits and everything else? How do you see gold in a portfolio now?

Brent: Well, I've always said that I think gold should be the cornerstone of every portfolio. Now, I'm not somebody who thinks that you should only own gold and not own anything else.

Craig: Right.

Brent: I very much believe in diversification. I very much believe you should have a diversified basket of assets. That includes fixed income, it includes equities, it includes real estate. But I think gold is a crucial part of that. And I try not to... I know you're gonna want me to give a prediction here, and I'm happy to do it...

Craig: No, no.

Brent: ...but I really don't own gold because I think it's going to $2200 next year, or... And, to be honest, I own gold, and I don't care if it goes back to $1700 or $1600. I don't own gold for what it will do over the next year. I own gold for what it will do over the next 5 to 10, 15 years. And to me, it's kind of insurance against political idiocy, for lack of a better way of saying it, right? And I think that any pullbacks in gold need to be bought, okay? So, if we're at $2000 now, we've been here several times, and we've pulled back. If we get a pullback to $1900, $1850, I think you have to buy it. If you don't already own gold, I think you have to buy that. And if you're looking to add, I think you have to buy on that pullback. If you don't own any at all, then I think you need to start buying some. Maybe you don't go out and buy it all right now, because we're, again, we're back at it's, pretty close to its all-time high.

But I think that in the years ahead, I think gold is going to double, maybe triple. But I don't know if that's gonna be in 5 years, 7 years, 10 years. I just think that that will happen. I don't, I do not think it's gonna happen next year. I don't think that gold's going to $3000 in 2024. Now, if it does, I'll be very...I'll be okay with it, because I own gold, right? And, you know, not gonna be the worst thing in the world, to say, "I don't think gold's going to $3000," and then have it go to $3000 and you made a bunch of money anyway. So, if I can make money being wrong, I'm happy to do that all day. But I think, if you understand that fiat currencies get debased over time, if you understand that the whole world has debt problems, if you understand that, you know, it's not just a U.S. thing, and the way that the world will deal with this, with these debt crises, is to inject more money into the system, over time, gold goes higher.

The flip side, and part of the reason I say you don't just go out and put all your money into it right now, is because I still believe that the biggest threat to the global economy is a spiking U.S. dollar, for many of the reasons that we've discussed before. And typically, when you get a spiking dollar, you get liquidating type markets. That doesn't just affect gold, it affects everything. It affects copper, wheat, oil, gold, equities, real estate. And so, I think investors need to be prepared for assets to go up and to the right over time, because fiat gets debased, but be prepared for these, you know, terrifying drawdowns along the way, and that means having some cash, or some kind of liquidity on the sideline, so that you can be a distressed buyer, rather than being a distressed seller.

Craig: Yeah. And like you mentioned, just because the dollar's going up doesn't mean gold has to go down year over year.

Brent: No. No, no.

Craig; You know, it's relative. The dollar index just compares the dollar to a basket of other fiat. You know, I posted a monthly, excuse me, a monthly chart of the dollar index. [inaudible 00:20:50] it must been back at the last month, on my site, going back to 1980, Brent. And it's basically just in a band between 80 and 120.

Brent: Yeah, yeah.

Craig: You go back to the, you know, or go back to the year 2000. It's the same thing, but since year 2000, gold's up ten-fold. So...

Brent: Yeah. Well, the other thing I'd say on that, too, is, for the people who... I know that most people, not everybody, but I would say the general consensus of people who are in the gold market have done so as, especially U.S. domestic investors, under the belief that the dollar is going to lose value over time. And history shows that that's the case. But for anybody who thinks that they don't need to worry about a stronger dollar, I would say go back to 2008 until now, and look at where gold was then. Look at where gold's at now. Gold's gone up a lot over that time period, but it's had several sharp drawdowns during that time period. Over that same time period, the dollar index is up 25%. So, the dollar's up 25% versus its peers. Now, it's down versus gold over that time period, but that is dollars and gold rising together versus all the other currencies.

Craig: Yeah. Yeah.

Brent: And when you see those spiking dollars, go back and look and see when you saw the DXY spike, and then go and look at all these different markets, equities, commodities, gold, you know, aluminum, steel, and look and see what those prices did...

Craig: Right.

Brent: ...during the dollar spikes, and you'll see that they all come down during those dollar spikes, and that's why I say you just have to be ready for it. I'm not saying you need to sell everything you own and just go sit in dollars. I don't think that's a very good idea. But you do need to be prepared for those drawdowns, because if the dollar falls, and continues to fall, that will be the central banks getting what they want, because that is...that perpetuates the current system. What causes all kinds of problems is when the dollar spikes, and starts causing defaults. You saw it in 2008, you saw it in 2020, you saw it in 2018, at the end of 2018. So, whenever you think about the Fed coming in and doing something, they're typically coming in to weaken the dollar, because it's gotten too strong and caused all these problems. So, if the dollar does fall back into the 90s, and then the 80s, and, you know, gold goes to $3000 and the S&P goes to 3700, or, I'm sorry, 5700, or whatever it is, and assets are up and to the right, well, central banks are probably okay with that, right? Because that's the system continuing on. So, I think you gotta just be prepared for these time periods when they don't get what they want, and then they have to come out and start a new program to fix it.

Craig: Like you said, you just accumulate on the dips. You know, I spoke to no bigger gold bull than Rick Rule. I think it was last month or the month before. And he said, "What frightens me is the prospect of gold going to $6000."

Brent: Yeah. No, absolutely. I mean, that's the other thing I would say, is, I know there's a lot of people out there who own a lot of gold, they own a lot of miners, and they think when the DXY goes to 80 or 75, and gold goes to $5000, they're gonna be flying around in private jets and laughing at everybody else, and I'm telling you that that's just, that is not going to be the case.

Craig: Yeah. Yeah. It's your ship. It's your shelter in the storm. It's your ship to get you through the tempest, from one side to the other.

Brent: Exactly. Exactly.

Craig: And that's the message we need to keep reinforcing. Brent, my friend, I really appreciate your time. You always do such a great job, and, again, for everybody who wants to find Brent, he is the CEO of Santiago Capital, wealth management firm, based in Puerto Rico. I know they can probably go to the internet and look up santiagocapital.com, right? And they can find you on Twitter?

Brent: Yeah. santiagocapital.com. You can find me on Twitter. @SantiagoAuFund is the handle. If you just type in Santiago Capital, you'll get a white seashell. That's me. I'm pretty active there. We have our own show that we do every week on YouTube, and it's on all the different podcast channels. It's called "Milkshakes, Markets, and Madness." So, check us out there. And I'm always happy to come back and talk to you. It's good to see you again.

Craig: It's always great...

Brent: One of these years, we're gonna talk, and Nebraska will have had a good football season.

Craig: No, we're not.

Brent: I don't know when that will be, but someday that will happen.

Craig: I give up. I, you know, I know several people think they're just cursed. And I'm leaning toward that theory. They keep inventing ways to lose games, stuff that you think, "I've never seen that one before. That's a new one."

Brent: It's amazing. It's [crosstalk 00:25:23]

Craig: It really is. It really is. All right, my friend. Thank you.

Brent: All right.

Craig: And, again, everybody, please thank Sprott Money on the way out. Either stop by and check out the bullion sale, the holiday bullion sale, or at least just give them a like or a subscribe on whatever channel you've been watching this on. That helps them cast a wider net, you get picked up by all the Google algorithms and all that kind of stuff. You'd be surprised what a simple click of the like button can do. So, please help us out in that regard. Brent, thank you so much for your time.

Brent: Thanks for having me.

Craig: And from everybody at Sprott Money and sprottmoney.com, thank you for watching. There's one month left in the year. We'll have all sorts of good information coming at you in December, and we will see you then.