Speaker 1So this is the bit when I tell you that nothing you hear in this programme 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. 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. Hello, and welcome to Money Markets and More with me, Dominic Frisby. 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 perhaps most relevantly of all on gold. He writes the newsletter, 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. Welcome, Luke, to the show. Lovely to speak to you. We say the wood from the trees, but you obviously say the forest.
Speaker 2We say, yeah, you can't see the forest for the trees in America. So that's, you know, close, like so many things between our cultures, right? So you guys have a perfectly good phrase and we say, yeah, we're going to do it our way.
Speaker 1There you go. So your latest edition of your newsletter, which by the way, I love, was sort of describing the, I mean, obviously we'd, 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 don't we start by talking about
Speaker 2that? Sure. He's in a, he's in a tough position where he's going to have to make some tough choices. And what I mean by that is, and what we described in the letter you're referencing is 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 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 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 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 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 U S 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 U S consumer spending. So, and consumer spending is about two thirds of GDP. So, uh, you end up with a lot of debt. You end up with a lot of debt. You end up with a lot of debt. So you make mathematically cannot grow consumer spending unless stocks rise because net capital gains and taxable IRAs, that doesn't even include all of the incentive comp equity, et cetera, 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 and equality. 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, 23. 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, uh, without being addressed from that point.
Speaker 1One 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. That's, that's, that's the, 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 provenance. 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 had to a week, a dollar lower interest rates? What does he like to decide and what are the ramifications for the dollar? Ultimately? Yes. I think he will go to a
Speaker 2weak dollar, lower interest rates. I think based on what, how the markets are reacting, some of the commentary from Warsh, et cetera, 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 stock market off the boil without creating any of the second and third derivative effects, raise rates, tighten policy a little bit without creating any of the derivative effects, at least before they get too bad. And then get back to what we ultimately want to, where they ultimately, I think they will 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 of 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 as Mike Tyson, famously said, right, everyone has a plan until 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 auspices 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, probably still before the American midterm election and, uh, and then away we go.
Speaker 1Okay. 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 fund markets, the free market and the fundamentals and all of that.
Speaker 2Yes. 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. Yeah. 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 all of that, a geopolitical angle of suddenly we are 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 be-all end-all 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
Speaker 1are clearly affecting the free market at this point. It's not really possible to have a really free market if China is massively subsidized, because then it's competing at a level which
Speaker 2isn't fair. And it's either China doing their subsidies, and some of the challenges, you know, the United States subsidizes too. I would argue we've done a much poorer job of subsidizing. So the Chinese have spent trillions in subsidizing factories, and the Chinese have spent trillions in subsidizing factories, and the Chinese have spent trillions in subsidizing factories, and the Chinese have spent trillions in subsidizing factories, and the Chinese have spent trillions in subsidizing factories, 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 value for their subsidies? Us? Or the Chinese who have overbuilt capacity in some areas, but other areas, very useful capacity, 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 that we sort of have to do as global hegemon. So yeah, absolutely. The subsidies are, are absolutely a factor, but it, it definitely leads into that. Yeah. Not free market.
Speaker 1There's so much I want to ask you, Luke, because just in listening to you, 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 this follows on from a lot of your stuff that I read a few months ago, and, you know, Trump was elected. And one of the things he's prioritized is the re-industrialization 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 things like chips and, and iron and, you know, whatever it is, antimony, whatever the commodity is. 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 suddenly become a really good jurisdiction for mining, whereas 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, speculative mining plays do. And I think that's a big thing. And I think that's a big thing. And I they've come off, they lost their value. But let's talk about this re-industrialization and the strategization of American commodities and factories and so on, and how that leads to inflation inevitably, and whether that's still a real thing. Let's talk about that big, because
Speaker 2it's a huge theme. It's a huge, huge theme. You know, and I think the simplest way to break down and pull threads from after that is the offshoring of the defense industrial base, of the United States, was disinflationary. This is why we did it. You move it to low-cost countries. You can bring prices flat to down, or maybe they don't rise as much. But your production costs drop faster than that. And so your profit margins for your companies rise. You keep cap wages and wage growth. That's disinflationary, because if your unions or your workers get too much bargaining leverage, you just ship their jobs to the low-cost countries like China. And so you have a lot of disinflationary. And so you have a lot of disinflationary. And so that whole dynamic was disinflationary. In my opinion, it strains credulity to think that doing the opposite of that, unwinding that disinflationary 20, 30, 40-year 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 sort of other new, 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. Can it? In my opinion, no. But there's timing aspects to it. And that's why I kind of measured. 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 engineering, go to business, go to finance, go to these other, these other fields. And these are not things that you can just, you know, bring in a boatload of, of, of low-cost immigrants and say, okay, now you're going to go well, our infrastructure. 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. And so that part absolutely going to be inflationary. The reason why I then measured myself as this AI tech. I get tech is highly disinflationary. Highly disinflationary. But the weird thing within it is with AI in particular, it's a technology that is. Under Mining 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 officials. And I would golf with him and his two other union officials. But he's 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, stages of grief around, wow. You know, the 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? 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? Cause now you're taking down receipts initially. And to be clear, I think AI is going to be a huge boom productivity driver sometime. Yeah, for sure. And, and I don't even exist. 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 hundred right now in America, entitlements plus interest on the, on the debt is already at roughly a hundred percent of receipts. So you're talking about inflationary trends here that will drive interest rates up, which all else equal, which then put upward pressure on the debt. So you're talking about inflationary trends here that will drive interest rates up, which all else equal, which then put upward pressure on the debt. So you're talking about inflationary trends here that will drive interest rates up, which all else equal, which then put upward pressure on the debt. So you're talking about inflationary trends here that will drive interest rates up, which all else equal, which then put upward put upward pressure on entitlements plus interest expenditures of the government and your receipt, which are already a hundred percent 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 in 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, but there's this interregnum period from, as AI is kind of spreading almost like a productivity virus, if you will. Mm-hmm . 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.
Speaker 1But the, the, the, the re-industrialization of America, I suppose that was the, the underlying question was, 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.
Speaker 2In my opinion, yes. There, 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 won. Biden came into office, and, and for as much as there are a lot of differences between Biden and Trump, when you look at the, at their policies vis-a-vis 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, et cetera. And, and it went into, to be sure, different things. They were in more green type tech versus the Trump administration was 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 u.s defense establishment okay and the u.s
Speaker 1intelligence 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 permitting for mines it's that has definitely changed under trump yes absolutely yeah okay um let me you . 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 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 five dollars and i was like how can three onions cost five dollars and i we bought i have a i bought a pineapple from costa rica and in my local shop in london and i bought a pineapple from costa rica and in my local shop in london and i bought a pineapple from costa rica and in my local shop in london and i bought a pineapple from costa rica and in my local shop in london and i bought a pineapple from costa rica and in my local shop in london and i bought a pineapple in london and i bought a pineapple from costa rica and in my local shop in london it costs one pound costa rica and in my local shop in london it costs one pound costa rica and in my local shop in london it costs one pound 25 which would be a dollar 50 something 25 which would be a dollar 50 something 25 which would be a dollar 50 something like that and the same pineapple in palm like that and the same pineapple in palm like that and the same pineapple in palm springs california which is much closer to springs california which is much closer to springs california which is much closer to costa rica it's its original thing was costa rica it's its original thing was costa rica it's its original thing was again five dollars again five dollars again five dollars why is that why is that why is that is this all monetary policy or is it is is this all monetary policy or is it is is this all monetary policy or is it is it uh uh what do you call it production it uh what do you call it production it uh what do you call it production lines factory lines what why is that lines factory lines what why is that lines factory lines what why is that same pineapple so much more expensive i same pineapple so much more expensive i same pineapple so much more expensive i i don't know i mean generally speaking i i don't know i mean generally speaking i i don't know i mean generally speaking i would say food is twice the price in would say food is twice the price in would say food is twice the price in america than it is in the uk and i would
Speaker 2america than it is in the uk and i would america than it is in the uk and i would argue it's probably lesser quality too argue it's probably lesser quality too by the way in a lot of cases maybe the by the way in a lot of cases maybe the by the way in a lot of cases maybe the organic stuff i would set aside but organic stuff i would set aside but organic stuff i would set aside but that's uh i wouldn't put the uk as some that's uh i wouldn't put the uk as some that's uh i wouldn't put the uk as some paradigm for quality food paradigm for quality food paradigm for quality food fair fair um fair fair um fair fair um i don't really know um you know for me i don't really know um you know for me i don't really know um you know for me i'm i'm i'm like the fish swimming in the i'm i'm i'm like the fish swimming in the i'm i'm i'm like the fish swimming in the water right if you ask a fish to i'm i'm i'm like the fish swimming in the water right if you ask a fish to describe this environment the very last thing describe this environment the very last thing describe this environment the very last thing this would be the water so for me this would be the water so for me this would be the water so for me where i notice it where i notice it where i notice it and and why i would and and why i would and and why i would default to it's at least a good chunk of default to it's at least a good chunk of default to it's at least a good chunk of its monetary monetary policy and fiscal its monetary monetary policy and fiscal its monetary monetary policy and fiscal deficits deficits deficits uh would be uh would be uh would be when i see things like we've seen in the when i see things like we've seen in the when i see things like we've seen in the last five years which is last five years which is last five years which is interest rates went on mortgages in the interest rates went on mortgages in the interest rates went on mortgages in the united states 30 or fixed went from 2.6 united states 30 or fixed went from 2.6 united states 30 or fixed went from 2.6 2.8 at the lows in 2021 2.8 at the lows in 2021 2.8 at the lows in 2021 to they're probably close to seven percent to they're probably close to seven percent to they're probably close to seven percent now so a near tripling of the rates now so a near tripling of the rates now so a near tripling of the rates and home prices didn't fall they kept and home prices didn't fall they kept and home prices didn't fall they kept going up going up going up uh including in areas where the uh including in areas where the uh including in areas where the demographics are shrinking so you have a demographics are shrinking so you have a demographics are shrinking so you have a supply of buyers shrinking you have the supply of buyers shrinking you have the supply of buyers shrinking you have the cost of money rising and yet the prices cost of money rising and yet the prices cost of money rising and yet the prices of the homes are still rising that of the homes are still rising that of the homes are still rising that shouldn't happen you see that farmland shouldn't happen you see that farmland shouldn't happen you see that farmland too over the last 10 15 years in america too over the last 10 15 years in america too over the last 10 15 years in america where where where crop prices generally versus 2011 are crop prices generally versus 2011 are crop prices generally versus 2011 are flat to down and yet the price of flat to down and yet the price of flat to down and yet the price of farmland which over long run tracks very farmland which over long run tracks very farmland which over long run tracks very closely with m2 money supply in the closely with m2 money supply in the closely with m2 money supply in the united states united states united states they've continued to go up right and they've continued to go up right and they've continued to go up right and ultimately these are two housing ultimately these are two housing ultimately these are two housing farmland are farmland are farmland are they are uh um they are uh um they are uh um assets that are either interest rate assets that are either interest rate assets that are either interest rate sensitive are based on an implied yield sensitive are based on an implied yield If you're a farmer, if the implied yield you can earn 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 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 years. And once global central banks stopped growing their holdings of U.S. Treasury bonds in 2014, something we described that as 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 liquidity. And I think there's an element of that within what I just described of this inflation where I think ultimately we have a lesser ability. To export our deficit driven inflation as a result of what I've called the de-dollarization of global FX reserves. Basically, foreigners are buying gold instead of treasury bonds. And that on a lag at a very slow pace leads to a more secularly inflationary environment in the U.S. than we're used to. So it's hard to point at one thing and say, but I think it's ultimately monetary policy, which is dictated. It's 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.
Speaker 1I 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, that the dollar has lost a certain amount of its integrity because of that. And I mean, let's talk about de-dollarization now, because it's quite interesting. If you look at China's treasury holdings. You will already know this, but I'm telling you, but I'm really telling the viewers. China's treasury holdings are more or less halved since maybe 2013, 2014, something like that. But its U.S. dollar holdings haven't. It's still got more than $3 trillion. So it's reducing its treasuries, but keeping its dollars. How real a thing is de-dollarization?
Speaker 2It is a real thing, but it needs to be defined properly. You can ask 10 people. What is de-dollarization? And you'll get a number of different definitions based on what the person wants it to say, right? It's the old Lewis Carroll, right? It's like, right? For me, and what we've been highlighting to clients for a long time, de-dollarization is the reduction of dollar FX reserves, certainly as a share of global FX reserves. Basically, foreign central banks stop buying treasury bonds. And start buying gold instead. Yeah.
Speaker 1And then also, maritime. 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. But we're at roughly 50, 55% dollars, and we're at about 30, a bit more than 30% gold. That's probably about right right now. And then I think treasuries are maybe 25%, something like that. I know gold overtook them last year. The dollar took them last year, so you're probably, that's probably about right, I would say.
Speaker 2But do the treasury holdings count towards the US dollar? Yes, they would, in that case. In that case, they're part of that. So it's that, and then it's also the de-dollarization 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. The de-dollarization trend on both of those fronts is real. Dollar dominance in terms of payments, still very, very great. 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 three years. So, you know, up 4x in three years is a huge jump. But it's, and it's statistically significant now, right? 8%. So will central banks then hold yuan? In my opinion, no. They'll hold gold.
Speaker 1I don't think, 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 you on and buy dollars or what will it do? What, what, what would, what, what will it do with the, with those reserves? Do you think?
Speaker 2I 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 funk factory store set up. Um, and so if they can buy Chinese equipment that they're buying anyway, and you want versus dollars, what do they care? Okay. And so there, that's sort of the first settlement dynamic of it, I think at the company level, then to the extent they still have you on leftover, they're probably going to sell those and buy dollars. Um, they could buy gold, but the company level that's private. Probably not going to happen. Um, and so practically speaking, when they buy dollars or sell you on 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 you on, will they reserve you on? I doubt it. I think what they would do is they would sell the yuan and buy gold.
Speaker 1Um, they certainly could buy dollars, but to the extent more and more, sorry, why does the central bank even have anything to do with it? with this because if if let's just say, you know, Chinese australian mining company x uses hsb for example i don't know which bank whoever it banks with bank of australia whatever and then it receives you on you know and it makes its trade just what involvement does the central bank have in that none i think i wouldn't think i'm going to
Speaker 2talk about the sort of the top down um yeah yeah just the the the net flows of it that ultimately um you would probably go through a you know a bank or market maker but you would end up netting those out at the macro level okay is how that would work essentially you rather than the detail flows yeah okay i understand and so we know that central banks are
Speaker 1buying gold although the rate of their purchasing gold has slowed um they're the countries that are buying them most gold are countries that lie along the silk road i've 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're saying 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 think it's
Speaker 2probably earlier in 2030 um what's 2026 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 gold and 50 dollar you know if you have continued buying gold and 50 dollar buying of gold by central banks call it a thousand tons a year and then you've got a i don't know 15 percent growth rate of in the price yeah you're gonna get there pretty close you're gonna get there pretty quickly and i and i think that's going to happen because the drivers what what the what the drivers of the de-dollarization 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 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 the dollar and they don't have any interest in the dollar and they don't have any 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 true for 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 paying you on you end up with you on mr saudi arabia mr russia you end up with excess you want 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 say those you want will always be money good for things we make but if there's still stuff if you still have you on 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 is 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 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 because they own a lot of gold and so what they are communicating with this system to their creditors is if you have you on surpluses change them into gold and then the price 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 to exchange your gold with us and you're going to get wealthier by trading with us and you want to exchange your gold with us and you're going to get wealthier for gold whereas on the american side for 50 years it's been hey hold our treasuries 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
Speaker 1is that china doesn't want reserve currency status for that no i think they
Speaker 2would and that goes against every gold bug in the world 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 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 carry are they they're holding the banner for green and environmental than they were 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 strategists investors oh who's the most screwed by who's 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 gonna go china was able to take pain greater arguably at least as well as the americans but certainly better than the europeans they were able to take down oil imports four to five 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 electric uh 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 de-dollarization and gold which is nobody trusts you on 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
Speaker 1issues i have with gold you know when i'm arguing 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 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 promissory money it's not money with no liability and we saw i don't know if you saw this but some hackers exposed the story three or four years ago where russia had been buying drones from iran and paying for them in gold and it was it flew three tons of gold down to iran i mean it's just so impractical so that's i don't see gold as a as 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 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 promissory yeah i think that
Speaker 2for 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 supranational level or the intranational level international level that shipment of gold from iran to russia uh i think there's an element of where that's going to 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 system i do no ticking no washing if yeah 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 plane load of gold to Riyadh 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 if 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.
Speaker 1It's the UK's number one export. We don't, it always amazes me when I learned 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.
Speaker 2And I think there's always, and I have, I've been in 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 our, in, uh, our, our newsletters of. Most economy, many, many economists in the west will complain the Chinese are mercantilist 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 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, 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 mind. 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 a century of humiliation, blah, blah, blah. It's repeating history's repeating in this way where the Chinese are running massive trade surpluses. And a big part of it was 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.
Speaker 1Hmm. 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. And just 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.
Speaker 2That's, um, so you, you can see. You know, ultimately it's all just a function of price, right? It's it's it's price or it's volume. And if you have the currency fixed to a unit of account or to do a unit of gold, that's
Speaker 1a problem, but yeah, no, it's, it's, uh, when I said revaluation, I meant the gold prices, the gold price is going to be officially stamped certain prices market.
Speaker 2Right. 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 autarkic. Yeah, trade, which is cultural. It's they've been doing the same thing for 300 years.
Speaker 1So 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.
Speaker 2I think that's exactly it. There's still, it's still viewed with a high degree of skepticism, which is fascinating to me because you can, you know, uh, Seymour Hirsch famously said the biggest stories are sometimes out in the open. Yeah. And this is right out of 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, you can see what central banks are doing. You can see the price rise. I mean, if, if you and I were sitting down doing. This interview, even four or five years ago, 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 5,500 and the sun came up and the lights came on and the market still worked. And they're 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 a thousand dollars, a bushel as a reserve asset or 10, what's going to happen. 6 billion people are going to starve, take oil to a thousand dollars a barrel to make it the reserve asset, the back, the dollar, like we did in the seventies, right? What's going to happen at the world economy collapses at 150. Um, as it 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, the oil ratio has gone from 13 to 60, uh, gold to treasury searching stock prices down in goal, 30% since 2022, you can see over and over and over. So gold went to 5,000, nothing happened. Gold goes to 10,000. Nothing happened. It's nothing that'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.
Speaker 1What, what gold going to 10,000 does both of those things. Um, nothing is as useless. And as useful at the same time, it's the quote from Peter Bernstein. 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.
Speaker 2It 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 Yeltsin to where the, somebody who's willing to sell off Russian interests to, on the cheap to, to Western Western interests. Uh, and redollarize 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, 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 nineties, early two thousands, where they really stifle their own domestic interests and, uh, cater to the U S um, then I'm going to be wrong, you know, where they start restockpiling treasuries, et cetera. 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, uh, U S U S austerity, probably the third, but I don't think we have to worry about that, uh, anytime soon, but we, we, we've, we've sort of run out of time, unfortunately.
Speaker 1Um, so why don't you give your newsletter and a nice big plug as we end the show and then yeah, do that.
Speaker 2Uh, yeah. If you're interested in learning more about our research product, FFTT-LLC.com, uh, for more information about our, uh, mass market and institutional research product. And, uh, uh, you can find me on Twitter with X, sorry, Elon, uh, at Luke Grohman.
Speaker 1Great stuff. Well, now I will put links, you know, in the description. Luke Grohman. Thank you very much. Thanks for having me on. It's great to be here.
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