How could the US Credit downgrade affect precious metals prices?

Sean Brazney: Hello! My name is Sean Brazney, Sales Director for Monex Deposit Company. I have the great pleasure of being here again with Jeffrey Christian, who is the author of our report that we have out currently, 2023 Precious Metals in the Eye of the Storm. Jeffrey, thank you very much for being here with us today.

Jeffrey Christian: Sean, it’s always a pleasure to talk with you and to help Monex. Welcome to the second half of Summer.

Sean Brazney: You know, I was looking through the charts and some news came up recently about Fitch downgrading the US credit rating, and it got me to thinking about the last time that happened, and got me to dive into the charts a little bit from that news. It brought up some similarities to the last time this happened. It got me excited to reach out to you for some real data instead of just my theory. Back in 2008, the great financial crisis, one of the biggest financial experiments of our lifetime really, we had huge bailouts, TARP twists, QE1, QE2, and QE3. We saw precious metals, of course after a little bit of a dip from that market crash, I think, silver went from $8 to testing all-time highs up near $50. I can say the same for gold on a significant run during that time frame. At almost three years after that event, the S&P downgraded the US credit rating, as well, it was in August 5, 2011. We saw kind of a peak in the precious metals market that showed a downturn and a downtrend for a little while. Well, here we are in 2020, COVID comes along and another huge injection of capital, trillions of dollars. Almost exactly three years after COVID and that experience, Fitch goes down and downgrades the US credit rating, almost a three year window again, and it got me thinking, is this going to be another long-term down trend, and do you have the data that can show some of the differences or maybe some of the similarities to the two events?

Jeffrey Christian: That’s a really interesting and insightful idea, Sean, and there are a lot of parallels between 2008, 2011, and 2020, 2023. If you look at what happened back then, we had a recession, we came out of the recession, we had the sovereign debt crisis globally, especially in Europe with Greece having to have its debt rescheduled at a time when the ECB didn’t have the capacity to help it, and you had the US downgrading. And interestingly, the US Treasury was downgraded in August, as you said, and gold prices peaked in September, and they came down after that. Silver actually peaked in April 2011. We entered a long period of time, 2012, 2019, where you had extremely low interest rates, you had 0% interest rates in the United States, negative interest rates in parts of Europe and other countries, you had very low inflation 0%-1% for a time, very low real economic activity, real GDP was basically 0%-1%, as well, for most of that 8 year period, and gold and silver prices came down and were relatively low compared to where they had been in 2008, 2011, for about 8 years. All of that started to change in 2019 and then we got into 2020, as you said, 2020 saw the kind of fiscal largesse that we had seen in 2008, 2009. For all of the similarities, and I want to say one other thing, we are in many ways similar—in a similar position. We have massive economic problems, financial market issues, and political issues that we are confronting right now, and as a world and as a country, we’re not dealing with them particularly effectively, similar to what we saw in late 2008. I don’t want anyone to belittle the problems that we’re facing in 2023 going forward and we do think that we will see a recession in 2024, 2025, and we do think you’ll see a hostile economic environment, and financial market instability, and political problems, both domestically and in other countries, and on a global international basis. However, I think that some of the outcomes—the evolution going forward from 2023— could be quite different from what we saw after 2011. We will probably see, we’ve are already seen much higher interest rates, and we probably will continue to see interest rates 5%, 6%, maybe even 7% over the next several years. We’re in a different interest rate environment. We’ll probably see stronger GDP and economic activity. They’ll be recessions, as I said, but will probably overall seem more volatile, real economic conditions, and stronger GDP outside of the recessions, and we might see GDP in the 1%-3% range, as we have over the last couple years. We’ll probably also see inflation somewhat higher than it was, it’s not going back to 0% or 1% percent, maybe to 2%-4% or 3%-4% going over the next several years, and we expect precious metals prices to be higher as well. We expect precious metals prices to be higher in part, because we’ve all lived through that previous period, that volatile scary period from 2007-2011, and that post-recession, post-great recession, post-global financial crisis— period of low interest rates, low inflation, low growth, low precious metals prices from 2011-2019, and we’ve all seen what has happened, and we’ve learned, some of us at least have learned some lessons from it. I think monetary authorities have learned a lot of lessons from it. I don’t know that fiscal authorities, by which I mean, the politicians that run governments have learned particularly useful lessons from what we’ve all lived through since 2007, but I do think that the fact that we’ve gone through that period will mean different monetary policies and different ways that investors respond. One of the ways that investors respond, I believe, will be stronger investment demand for gold and silver, because of the economic uncertainties, and because investors have lived through that period from 2007-2011, when things were really scary, and that period from 2011-2019, when things were very lethargic.

Sean Brazney: Looking out ahead, I feel like there’s a year’s worth of conversation we could have over these topics. You get into commercial real estate, you get into debt, you get into geopolitical issues coming up in the next year, war. There is so much going on. And as you are the author, CPM Group, and your many analysts over there being the authors of our 2023 Precious Metals in the Eye of the Storm report, you’ve got so much great data for our viewers and our listeners out there. All they have to do is call Monex, talk to an account representative, and get their free report. So, we really appreciate your time today, Jeffrey. Thank you for being with us.