Interview with Keith Weiner
All this borrowing to consume is unsustainable and the bill is overdue
June has been an interesting month for gold, as geopolitical events, market fluctuations and developments on the monetary policy front fueled an exciting ride for the precious metal. As long-term investors with a strict focus on the big picture, short-term moves and speculative angles are largely irrelevant in and of themselves, but they do provide important signals that, without fail, confirm the strategic superiority of precious metals holdings in this highly overvalued and artificially inflated investing environment. As anxiety grows in equity markets and as central banks are once again called upon to add even more fuel to sustain the overstretched bull run, more and more investors seek refuge in gold as they brace themselves for a very bumpy ride ahead.
In this context, I turned to Keith Weiner, CEO & Founder of Monetary Metals, for his perspective on recent developments and his long-term outlook on precious metals. Keith Weiner regularly publishes insightful analyses on economics, monetary policy and precious metals. He has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads, while he also serves as President of the Gold Standard Institute USA.
Claudio Grass (CG): In the last couple of months, we have seen volatility return to the stock markets and investor anxiety on the rise. The trade war and a slowing economy seem to seriously threaten the record bull market, while predictions of a recession hitting before 2020 are gaining traction. Many blame the trade war for the increased choppiness. Do you agree with this assessment, or do you think it is only exposing deeper problems?
Keith Weiner (KW): The trade war cannot help. And in addition to the obvious problems of declining revenues (and standard of living for everyone), there is a monetary problem. Corporations all over the world borrow dollars. Trade restrictions make it harder for them to get dollars. This perversely drives up their demand for dollars. And a rising dollar, as they measure it in their native currency, puts additional stress on them. Their debt service payments are going up, just as their ability to generate revenue is going down.
Aside from this, we have had a very long boom by any historical measure. After the debt crisis of 2008, central banks have gone all-in to enable every government and corporation and individual to borrow more. All of this borrowing to consume is unsustainable, and the bill is overdue. This is much bigger than the trade war, so far at least.
CG: The consensus expectation is that the Fed’s interventionism will once again come to the rescue and, through rate cuts and potentially more liquidity injections, keep the markets going. The same accommodative policies can be seen over in Europe as well. Do you believe this is a sustainable approach? Can central banks really keep supporting equity markets and the wider economy in perpetuity?
KW: No, it is not sustainable. We borrow to consume. And then, unsurprisingly, we have a problem paying. This is part of the broader picture of falling interest rates. Each time the borrowing slows, it is a crisis because many debtors depend on the boom in order to be able to service their debts. So, the central banks push the interest rate further down. But what happens when you get to zero and below?
At the same time, the marginal productivity of debt (MPoD) is falling. This is how much GDP is added for each new dollar of debt. So, the effect of adding more debt is diminishing. MPoD should be well over 1, but it has been falling for many decades. What happens when MPoD falls below 0? I call this the heat death of the economic universe.
CG: On the subject of negative interest rates, you have often discussed some of the perverse outcomes that the policy has created, such as the state of gold’s “permanent backwardation”. Can you explain this example for us?
KW: In a normal universe, if a business destroys investor capital at a rate of -1% per year, it should be shut down. Its remaining capital should go to businesses that create wealth. But what if it can borrow at -2%? It generates a profit of +1%.
In Swiss franc terms, gold futures – all contracts – are backwardated. They trade below the spot price. The reason for this is that it is logical for Swiss enterprises to seek to avoid holding francs. Suppose you had CHF 100 million and had a payment due in one year. If you held the balance in a bank or in the bond market, you would lose CHF 750,000. It would be preferable to buy gold and sell it forward. That way, you take no price risk but avoid the penalty for holding francs. However, the market anticipates this and the cost of selling forward is greater than 75bps. They can buy gold unhedged, or incur the 75bps loss of CHF. The same occurs if they think to do it with USD.
CG: Gold purchases by central banks have sped up in recent years, especially in countries like Russia and China, where gold reserves have been swelling at a record pace. What do you think are the main motivations behind these moves?
KW: I think they have increased worry that they could be shut out of the dollar payments system. Also, the interest they earn on their dollars, while still positive, may not be worth the risks and so gold looks relatively more attractive. I do not think that they anticipate or want a gold standard at this time (though the remarks of Malaysian Prime Minister Mahathir are interesting, as he spoke of an Asian currency that could be backed by gold). I do think they may expect price appreciation, and worry about US government borrowing and Fed policy resulting in a devalued dollar.
CG: Given the particularly tense economic and geopolitical environment we’re currently facing, what are your expectations for gold’s performance over the next couple of years?
KW: I expect people to return to gold, as they realize that it is better to hold an asset with no yield than to incur a negative yield. Either overt, as in Switzerland, or effective (especially with credit default risk) elsewhere.
CG: What about silver? The metal’s price is at extremely low levels, especially in relation to gold. However, it seems to be stuck in this low range for quite some time now. Why do you think that is and do you expect it to change soon?
KW: While gold is the money of sovereigns, institutions, and wealthy individuals, silver is the money of wage-earners. Wage-earners are either not aware of the banking system risks, or they are under financial pressure and not able to save. Silver is more efficient than gold for saving some of one’s wages. Suppose one puts $50 a month into the monetary metals. With gold, that would be a very small sliver of metal, and one would pay a big premium for manufacturing cost. With silver, it’s a stack of 3, 1-ounce coins and less expensive. Silver offers smaller losses to get in and out for wage earners.
Silver today – at a gold-silver ratio of 93 – offers a better relative bargain than gold. Some institutions may not be flexible enough to buy it, but some are and of course wealthy individuals have a choice. When this trend begins, others will pile on. Silver will have its day, and one should expect a reversion to the mean for the gold-silver ratio, close to half its current level.
CG: Through your company, Monetary Metals, you have pioneered a new way of investing in gold, one that offers a yield. Could you outline for us how it works and what your experiences have been like so far with this model?
KW: We offer gold and silver leasing. We find businesses who are using it productively, typically as inventory or work-in-progress. We bring these deals to gold investors, who can offer their metal and set the minimum interest rate that they will let their metal be used. We have been growing exponentially, and investors are excited. They get typically 2 to 4% interest—that is gold on gold.
We are about to issue the first gold bond. What makes a lease, a lease, is that the metal is physically present. It’s not a loan, and not financialized. A bond is credit, to finance construction, payroll, etc. We have a program to finance qualified mining projects, where the risk is suitable for fixed-income investors. The interest rate on the bond will be much higher than on leases.
CG: Overall, in this time of heightened uncertainty, what would be your advice to investors who wish to protect their assets and survive a potential crisis that might already be on the horizon?
KW: Look carefully at your investments. And pay attention to two factors. One, the risk that the issuer could default. Defaults are coming. Two, the need for credit among the buyers. When stresses reappear (watch the spread between Treasury bonds and junk to see this), there may be a lot of forced selling.
In 2001-2008, the price of gold had run up a lot. So, there was a lot of gold held with leverage. And that forced liquidations, though it should be noted less than with stocks, and the price of gold recovered and went to new highs long before stocks. This time, we are coming off a long bear market. I doubt there is much leverage among gold owners right now. Thus, I would expect less forced selling and more panic-buying, as the financial system will return to risky times and volatility, if not outright defaults or at least bail-ins.
Claudio Grass, Hünenberg See, Switzerland