Gold is faced with a double-edged sword of inflationary pressures, said Gary Wagner, editor of TheGoldForecast.com, who expects near-term downward pressures to prevail. Wagner discussed with David Lin, anchor for Kitco News, the Fed’s options after Jerome Powell admitted in a testimony Tuesday that the current economic path is “unsustainable.”
is it possible that we will return to the 1970s era of very high inflation and low growth? And is it possible also that the us could become bad? Should interest rates rise above a certain threshold. We're here to discuss this and the gold price reaction to those questions that were asked exactly to that judge room Powell yesterday with Gary Wagner, editor of gold forecast.com.
Gary, welcome back to the show. Now, uh, those two questions I stated earlier in the intro, those were asked to Jerome Powell yesterday. We're going to talk about both these questions and concerns that investors may have. Let's take a listen to the first clip. Is it possible? The high interest rate that we're seeing today is the start of something that could be as you know, as bad as the seventies.
And if, if, if not, could you explain why? Very, very unlikely, um, what, what, uh, what we're seeing now we believe is, uh, inflation in particular categories of goods and services that are being directly affected by this unique historical event that none of us has lived through before called reopening the economy after, after closing it.
So you see. Extremely strong demand for labor, for goods, for services. And you see the supply side caught a little bit flat-footed and trying to catch up and you see bottlenecks with, and you see this all over the world, by the way, this is, this is not just the United States. Uh, we, you see it everywhere.
Um, and it's very similar kinds of situations. And you also, you have, uh, a central bank that's committed to, uh, to price stability, and. Has it, you know, defined what price stability is and is strongly prepared to use its tools to, to keep us around 2% inflation. So all of those things suggest to me that an episode, like what we saw in the 1970s and I w I w I graduated from college in 1975.
I had a front row seat. Okay, Gary, there, you have it. He said basically two things, two main key key takeaways from that message while we will return to the seventies in terms of economic condition back then and to inflation right now, of course is transitory. He's said this before. He's doubling down. Do you agree with either of these things?
Well, first of all, I do agree with the first part. I do not think we're going to see inflation as high as we did in the seventies or interest rates were up between 12 and 20%, depending on when in the seventies you're looking at. I also graduated college in 1974. So I had a second row seat, let's say from Jerome Powell.
And there's no doubt. That was a unique time. But we didn't have the kind of global crisis that we're having now. And the second statement is what. Contend with, and that is the transitory nature of current levels of inflation and right about certain things, the supply chain shortage, just for example, uh, cars, the lack of auto chips, uh, and employment.
Those are going to be transitory issues, but I don't know about the mainland and Canada, but if you go to pump gas right now, it's extremely expensive. When you go to the store. Uh, goods and services, milk things. Food are extremely, extremely inflated from the prices we saw one year ago. And I don't believe that that is going to be transitory in the same way that supply chain shortages are and such as labor and auto manufacturing.
So there, I have more concerned because if the fed is off. About the levels of inflation. We could see it ramp up higher in terms of interest rates, because it's the only way the federal reserve can control raging interest rates and raging inflation. Excuse me. And so that's, what's important to take away from that comparison of the seventies to current market scenario.
Gary. Why do you think that Senator even made the parallel to the seventies? What's the similarity here between now and back then. Well, they, they had run a runaway inflation and his fear is that we might return to that type of scenario where if it's not transitory and goods and services continue to rise even 5% or 6%, um, we could see dramatic action by the fed in terms of raising rates to control that their, their mandate has changed.
Their target was 2% right now, the core inflation. Is, um, the core inflation rate right now is about two, 2.4%. The other comparison is a spending by the government. And if you look at our current national debt, it's the largest in history and we added 4 trillion to that debt. What was it last year? About 2 trillion this year with Biden's proposal for an infrastructure program, that would be another 2 trillion.
That means we've added 8 trillion to our national debt and surfacing the interest on that could be difficult. Well, I think, uh, the other concern and, uh, that goes to the second clip that we're about to watch is what's going to happen to interest rates suppose inflation suppose. You're right, Gary.
Suppose we do have interest rates or inflation rather that continues to run hot. It is not transitory. Well, eventually the federal reserve is going to have to run. Interest rates that would be the logical step that the central bank would need to take. And of course, the concern of the concern among investors is that we can't afford to pay, um, interest expenses on higher interest rates.
So get this right. We have $30 trillion of debt currently around $30 trillion of debt. Now at 5%, that's a $1.5 trillion. Of implied interest expenses. Every year we currently have around $3.5 trillion in revenues from taxes. So more than half our tax revenue is going to go to interest payments. We can't afford that.
And that's exactly the second question that was addressed to drone power, take a list. It any remains on its current trajectory and interest rates reach their historic average of 5.7 5.7%. You think the federal government will be able to pay its bills. I have, I have no question that the, that the U S government will be able to pay its bills for the foreseeable future.
There there's a, there's no case in which that would, that would not be the case. We have, uh, the strongest and largest and most flexible economy in the world. It's also true though, that we're on an unsustainable path and that we're going to have to address that. And as I mentioned the time to address it, that is when the economy is strong.
Unemployment is low and. Economic activity is high. Okay. So Garrett, he straight up admitted that we're on an unsustainable path. So I think anybody who's just crunched, basic math and lesson, getting it wrong would probably agree with the notion that we can't afford, uh, interest payments on 5%, 5.7%, the historical average.
So what, what, what do you think they should do? He said we should address this. What, what would they be doing to address this problem, Carrie? Well, first of all, Powell did acknowledge in that state. That the path they're on is unsustainable. Meaning you're spending more on your payments of tax interest and other programs by the government that are beyond what our GDP is, what he said in the second part of the statement is that he'll address that when our economy, which is vibrant, could go to what, five, 6%, uh, GDP.
Uh, an enormous number. We typically hear about two to 3% GDP pre pandemic days. And so he's betting on the economy getting to such a vibrant level that it will pay off the expenses that we're incurring. But what scares me is that he's acknowledged we are on an unsustainable track currently, and he's betting on the current rate of inflation.
Being transitory in nature, a large part of that. If the fed gets that wrong, that could spell problems in the future. Because if we get interest rates that go to three or four or 5%, it's going to create a large burden for the government just to pay the interest payments on there, the amount that they owe that, what did you say?
30 trillion. And 3 trillion now. Yeah, 30 by the time it gets to 5% and it's obviously going to be more correct. And so they, they handle that needs to be placed upon this is current spending, uh, by the administration. And that doesn't look like that's happening. He is spending like no other president. Um, and so that is unsustainable while he is also raising capital gains taxes.
Corporate taxes. Uh, you know, do you think that's going to be enough to finance this deficit? It could be that the question is how much pushback are you going to get from the Republican side of the Senate, the Congress that won't allow those things to happen, but you're correct. The, the real answer is to raise taxes on rich and corporate, uh, structures, but to get there through an implemented is a hard sell at best.
What other options do they have Gary, but more MMT, more money printing. That's what they're doing now. I mean, we, we are on fairly a unsustainable path. There's no doubt. The fed continues to purchase $120 billion in assets. Now that's not the same. As like fiscal stimulus in which they're actually turning the presses on and sending out stimulus, uh, checks from money.
We don't have that's what's happening with unemployment now. So the key is going to be for the treasury to tighten itself. And that's Yellen's job, of course. And for Powell to keep interest rates at a level that allows the government to maintain its interest payments. The question is inflation because that is something that no government entity can control.
So if inflation begins to really tick up and I am seeing it here personally in the grocery store at the gas. When I buy a shirt, goods and services are costing a tremendous amount more. And I don't believe that that's transitory. If the fed is basing its assumption on that, most of this inflationary pressure will dissolve over time as us citizens go back to work.
Cause that's a big issue and some of the supply chain shortage. I agree with him, but what about oil? The, he stopped controlling that and that's a large component of current inflation as well as goods and services. So they're in a quagmire, they're in a quandary right now as to what to do. It's really where I see a chairman Powell and the fed holding onto their seats as we move forward and hope.
That they're right about the transitory nature of the current inflation rate as it grows, because they use the core index that's sitting at about 2.4. But if you look at the CPI that ticked up to 5% now a good part of that is transitory, but not all of it. I think that the vast majority of the inflationary, uh, changes we've seen are coming from goods and services.
Okay. Well, what of they're wrong? What if it's not waning as Jerome Powell has said, he used the word waning to describe prices going forward. What if he misses that target? Does he have to do, is you forced to raise rates sooner, sooner rather than later? Exactly. Because he couples those statements that we have tools in our tool boxes, if that should occur to alleviate that scenario.
And exactly what he's saying is we would have to raise interest rates early. And stop the inflationary rate from continuing to rise it, to pay said it is if they do that, that presents a whole new set of problems. Let's talk about gold then, because the gold market didn't seem to respond yesterday to these statements at all.
So either the gold market agrees with Powell or they're just completely disregarding his comments. Funny things. Yeah. You know, I I've talked about this in, uh, in my daily Kitco letter for about the last two weeks, the double-edged sword of inflationary pressures, because on one hand, if we get inflation rising, Then Powell will at some point have to act now to your question about gold.
I think that gold participants were largely ignoring yesterday statements because we saw the market trade flat today. We did get a rise from that. It was kind of a knee-jerk reaction that was delayed and gold traded up to 1796 before the yields in the year notes began to come down and as they came down, so.
Sorry, the yields came down and don't yield gold, move in different directions. Wait, wait, wait, let me get this right. The yields did come down. Or excuse me, it wasn't the yields, the price of the ten-year notes came down, which is the opposite. So I correct myself and therefore we saw gold back off of its highs.
Okay. Yeah. Okay. That makes sense, Gary. Now, what, what's your, what's your outlook going into, uh, going into the rest of the month? We're closing in on a we're we're just about to enter summer officially. And of course the summer months have not officially and historically been very volatile for any market.
What do you think is going to happen at this time? Well right now, what we're seeing in gold is it's hit a, a very, very strong, low back last week. And it has been trading in essence sideways. And it's either forming a base before going lower and higher. That's obvious. It's not telling you anything, but my money right now, all things being equal, we could see a trade sideways to lower over the next month based on what we're seeing.
The other side is if we see big upticks in inflation, that's going to change the entire scenario because inflationary yields or inflation as it rises, of course, is a bullish undertone for gold. Whereas the yields on treasury notes as they rise is a bearish undertone for gold because now people can move money into a fixed asset rather than the safe Haven.
All things being equal. I would look to for gold to stay around the area where it's at, and it could all things being equal, trade lower under pressure. Okay. Trey, lower under pressure. And given that this week has been relatively flat subdued in terms of price action. Are you trading the market right now?
Are you staying out of it? Um, what, what's your, what's your take on, uh, action in the media? Well, we have been plaid ever since the moves last year. Think about it this way. When Powell came out with this press conference on Wednesday, we had a $47 drop in gold futures that was followed the following day on Thursday by an $87 drop.
And then Friday, we had a $10 drop to kind of cap off. That forced me to say, where is the dust going to settle? And we are neutral. We have no active trades right now because of that. And I've got to see some real signs of the market reversing gold reversing before we reenter, uh, gold futures from the long-term.
Uh, Gary, most gold analysts I've spoken to, um, and some economists as well would agree with you that inflation is not transitory. Of course, I've heard the other side of the argument, but I'm just saying that, you know, most of the gold people that I've spoken to have said that. So if let's assume the entire goal that let's just make the assumption that the entire gold market follows this narrative, why isn't the gold price going up?
Is gold no longer acting as an inflation hedge, or is that too far of a stretch? Well, I don't think it's so much as it's not an inflationary hedge, because it will remain to be, it has been for the last couple of hundred years, but I think what we're witnessing is a booming us equities markets. We had record closes over the last couple of days.
The NASDAQ went to an all time high yesterday, today, the S and P and the NASDAQ went to all time highs. So it's liquidity theory. Investors are going to put their capital where. Believe they're going to get the best returns. And right now that is in us equities. So I think that the equities are pulling not only from that you've got the cryptocurrencies crash.
And so you would think maybe some of that's going into gold. I think the majority in terms of the. Institutional traders and sophisticated investors is going into equities as that market excels in terms of performance, in terms of gold as a hedge against fear. You know, this struck out to me, uh, when I listened to Powell speech, I don't remember now, correct me if I'm wrong, but I don't remember the last time a government official came out and made a public statement and said that we are on an unsustainable path.
Those are not words you want to hear from a central banker. Yet gold, supposedly a safe Haven asset didn't move at all. That's it? Well, uh, they're, they're obviously taking Powells comments and believing what he says. I'm not so sure he's correct about the transitory nature of inflation, but everyone knows that is following the markets, all of the analysts, all of the economists that you can't spend.
More than you make households. Can't do it. Businesses can't do it. That's because that's because you and I don't have printing presses in our pacemakers. Exactly. So the government does have the ability to do that, but that's a unsustainable path. And frankly, I was glad to hear him acknowledge that because we can't continue to spend more than we make.
And that's, that's the question. Now his answer to that was it. Oh, GDP will make it. Once the workforce comes back and wait, we've got a six to 8% GDP. We're able to pay our bills. However, if he's wrong, then we are in some trouble down the road. Okay. Let's follow up later, Gary. Uh, should things turn south?
Uh, we'll have plenty to talk about for sure. Thank you so much for coming on the show today. Thank you for your updates. Thank you very much for, for having me. We wish everyone. Well, thank you for watching Kitco news. I'm David Lynn.
Yeah.