How Are Metals Prices Correlating to the Market and What Could The Fed Do Next?
Sean Brazney: Hello. My name is Sean Brazney, Sales Director for Monex Deposit Company. I’m here again today with Jeffrey Christian, who is the Managing Director and Founder of CPM Group. He’s also the author of our, New Decade for Precious Metals Investing Report and of course our CPM Group Reports on gold, silver, platinum, and palladium. Thank you for being with us here today Jeffrey.
Jeffrey Christian: It’s good to be back with you, yes!
Sean Brazney: Yeah, I want to just bring up your CPM Group market commentary that came out today. It was titled, “Gold Realism” and addressing all the chatter we see out there on the web, of you know, gold going to $5,000 - $10,000 an ounce and…boy, you just came out strong and to the point in this commentary. I want to remind our listeners that if you haven’t yet, please, go to CPMGroup.com and sign-up for their market commentary and their information, as the information is very refreshing and when you start to get into real research and analytics it’s great to have that knowledge base at our fingertips. Again, thank you for that information.
Jeffrey Christian: You’re welcome, yes!
Sean Brazney: That brings me to a point of another topic that tends to get a little bit oversimplified and that’s the dollar to gold correlation, where many people talk about… many investors talk about when gold goes up the dollar goes down or vice versa. As we know, that’s really not that true. From mid to late 2018 until really the beginning of this year, gold and the dollar were holding somewhat of a positive correlation. Although that did slip here in March, where we saw the dollar spike up near that 103 and gold put in a low down at $1,450. It seems we have a little bit more of a negative correlation now taking shape and do you think that correlation will continue?
Jeffrey Christian: No, I think the negative correlation is going to slip away. One of the points that we always make is that gold trades against currencies, not the dollar, and if you look at the long-term statistical relationship between the dollar and gold, since gold prices were freed in 1968, it’s about a negative 34% of correlation, which means a third of the time gold is trading in the opposite direction of the dollar, which means that in the other two-thirds of the time it’s either trading in the same direction or it’s not trading in a correlative fashion— one’s treading water and the other one is rising or falling. I think what you’re seeing is 2018-2019, they were in a positive correlation as you said and what you saw was gold and the dollar are the two safe haven assets of choice around the world. In 2018-2019, people were buying both. In 2020, you see a shift and what you’ve been seeing is that the dollar is moving kind of sideways to lower and gold is rising. So, you’ve got people saying, in terms of safe havens I prefer the gold right now to the dollar. So, they’ve been buying gold and they haven’t been buying dollars. We think that’s going to continue. So, that we think that over the next year or two what you’re going to see is a correlation that’s either zero or negative. Our inclination is the dollar kind of moves sideways for a variety of reasons in the international monetary system and gold continues to rise. So, that you have kind of a closer to a zero correlation. If we’re wrong, we think the dollar falls and gold rises and we have a negative correlation.
Sean Brazney: Also, regards to the Fed, we’ve throughout the last several months, we’ve seen the Fed come in and be accommodative to the markets. I’ve also been reading some information about the Fed reducing its balance sheet or what you and I have talked about in the past with quantitative tightening and it can get a little bit confusing. Can you give us a little bit of a rundown as to where the Fed really is being accommodative and maybe some other areas where we still expect them to divest of the balance sheet?
Jeffrey Christian: Confusion is universal right now, but in terms of the Fed here’s the way we look at it. The Fed will be as accommodative as it needs to be to keep the U.S. out of a recession or a depression rather and deflation. So, I think the Fed… the overriding direction of the Fed is as much accommodation as is needed. Now, you see little things where they’re tightening here, or they’re tightening there, or they’re changing their rules on some of the asset purchases and programs like that, as you and I have spoken. We see that as sort of like a captain of a ship running a little motor here, a little more there to sort of keep the thing moving forward in the direction that he wants. So, we think that those little boughts of tightening are just really tactical moves and that the overall strategy is to continue to be as accommodative as will be needed and that is going to be extremely accommodative for the foreseeable future, the next year or two.
Sean Brazney: A lot of the news we see out there, or at least online, or the chatter I like to refer to it as, it has been talking about this accommodative position being somewhat aggressive, is of course going to crash the dollar, or crash the economy, and you’ve been real instrumental on helping us understand about the real dollar, the need for dollars around the globe. Do we still see that dollar demand happening moving forward here over the near term?
Jeffrey Christian: Well, it’s interesting, because we were looking at excess reserves and nationally chartered banks yesterday and they’re very high. They’re higher than they were at the peak during the global financial crisis. I think they were about $2.8 trillion then and they are about $3.2 trillion now. So, you’ve got a tremendous amount of money that the Fed has pumped into the global financial system that’s sitting in the banks and that’s a problem. If that money comes into the market, you could see some weakness in the dollar, but right now what you’ve got is a world that’s basically still very starved for dollars.
Sean Brazney: Great information Jeffrey. Time with you, of course, is always extremely valuable in information. Thank you very much for joining us today here. Also, for our listeners, please call and talk to our account representatives. Ask for the New Decade for Precious Metals Investing Report, as well as our CPM Group Reports for the research and analytics on gold, silver, platinum, and palladium.