Gold has held a strong relationship with inflation expectations but more importantly, gold tracks real interest rates, so if nominal rates rise faster than inflation, then gold would see pressure, said Lobo Tiggre of The Independent Speculator.
If inflation expectations are ticking up, why is gold not following upwards as well? Noble T great of the independent speculators here to discuss macro and answer the question, hopefully that I just pose Lobo. We'll come back. Thank you, David, and I'm glad to be here. And I think this is a perfect question.
Perfect timing. I mean, I think the audience, they, they have to be asking themselves this, this is crazy gold and silver, monetary metals, the world's best inflation hedges for thousands of years. Why on earth? Should expectations of higher inflation, be bad for gold. Makes no sense. I still have an idea. I opened the, uh, segment by, by saying that expectations for inflation are picking up.
That is the consensus view, but first of all, Lobo, do you agree? With this consensus view, our inflation expectations, indeed picking up, I'm looking at, for example, the tip ETF, which I use as a good proxy for inflation. It's the ETF that tracks inflation protection. Uh, and, uh, right now I see it's down. It's been down for a couple sessions now.
So, uh, what indicators are you looking at? Sorry, let me, let me jump in this. There's the real world. And then there's what economists and the numbers that people look at. So yeah. Exactly what the fed say defines as inflation expectations and whether they see them rising or not. It's absolutely clear that in the real world expectations are rising.
And I th you know, I think you can see the bond market reacting to that. So it's not just me saying that there's actual data. Well that we're getting from the bond market saying other people, investors in players in the markets are seeing us, right. It's just, just, you know, reality check. Look at the headlines.
Look at well, commodities prices look at copper and nickel at multi multi-year highs, but even things like food and oil also heading upwards, but like the, the headlines about food that strikes me as being the kind of thing that the powers that be really can't ignore. I mean, it could be a while before a higher copper prices translate into hierarchy.
Um, prices in a Walmart for goods made that you buy there. But if grains are going up, that translates very quickly to higher food prices and that's starting to make headlines too. So in my mind, there's no question that not only are inflation expectations going up, but inflation is going up. Uh, and the powers that be, of course, we are trying to downplay that, but they can only do that for so long.
Okay. Right. I, I was just, I was referring to this ETF in particular, the, a tips. I share tips, bond ETF, which tracks the, um, treasury inflation protection security. And I've noticed that historically it has a 95% correlation with gold. What I've seen is that over the last month or so, it's been trending down.
Ted a short up now and now that's what we're see that our Virgin has had a short pickup on the, uh, in the last few sessions, but gold has not followed gold has gone up a little bit. Tips, tips, CPI, L CPI with all its limitations. Uh, you know, hasn't moved yet. So if we're talking expectations versus measured by CPI, you're going to get a different result.
Right. All right. So, okay. So let's assume that, and that you're writing expectations for inflation are picking up or should be picking up. Why is gold not following? Why is gold still right now? I'm looking at the latest numbers. It's 1738. So we're at sub $1,800 levels. This is a little bit bizarre. Don't you think?
I do. Uh, yes and no there, I think, you know, frankly, I think Mr. Market is making a big mistake. That's the title that I put on my most recent free newsletter free no spam newsletter. Uh, Mr. Market is making a big mistake and that's understandable for the reasons we've been discussing this, this, this knee-jerk reaction of higher rates.
A gold doesn't pay interest. Higher rates are bad for gold, right? You're going to compete, uh, as a, as a monetary vehicle, you don't pay interest. Uh, interest rates are going up. So you're out. If you don't pay interest. Now, the thing here is, you know, we're looking at, um, expectations as we started the conversation and the real rate you take CPI, and you take the, the, the nominal rate and you subtract the CPI.
So you have the nominal rate, moving with the expectations now, but you have CPI not moving yet. So mathematically, you're going to see a situation where the real rate is it's not turning into positive territory yet, but it's less negative. And that directional change matters. Real rates have turned less negative.
When you look at the benchmark 10 year, uh, yield, and that does impact gold. That does make that, that old argument that we've heard about, you know, gold doesn't pay interest. So when rates are rising, that's bad for gold. Right. And the irony though, is that the reason why rates are rising is inflation expectations.
So you've got inflation expectations, creating. This idea of, Oh, well, let's sell the world's best hedge against inflation. Yeah. Now the mistake here is that, um, you know, this directional change now is, is it's based on lagging data, right? So yes, nominal rates are rising and because real rates will take some time for the CPI to adjust.
Um, your real rates are less negative. Now that does matter. But that's going to change and rising nominal rates are not necessarily bearish for gold. If real rates don't rise as much. So what I'm saying is when the actual inflation kicks in, when it goes from expectations of inflation to actual inflation, and you start subtracting that from the nominal rates, then you get the real rate going down.
And we have seen this historically. I don't know if you remember. Um, but back in 2004 to 2007, There was a period when gold prices were rising while nominal rates were rising. And part of that was, it was higher inflation. It was offsetting the nominal rates, the real rates were not rising as much. Um, and we also had, uh, the dollar falling for other reasons.
Could it be, uh, couldn't the nominal rate rise even more. Should inflation next you're seeing inflation will eventually pick up. Sure. But I'm just positing a scenario where if that happens, the nominal rate will rise even faster than the pace of inflation. And then, and then real rates would still be ticking off.
Right? Well, two things that's, that's a guess. We don't know whether nominal rates will rise faster than inflation. I think right now, nominal rates are kicking up with inflation expectations. Uh, but then when the real dance starts. I think nominal rates tend to react more so they'll, they'll follow, not, uh, CPI inflation.
So I do think CPI inflation will rise faster than yeah. Nominal rates just sort of in the normal course of the market, but yeah, on top of that, so that that's me. That's me saying, that's what I think. I can't prove that that's just what I think. But on top of that, we also have the fed itself, which does not want higher rates.
The last thing the fed wants in the world right now is higher rates in any fashion or form. It's still in that mode of trying to stimulate the economy, a commodity of monetary policy, higher rates, even what we have right now w flies directly in the face of the main thrust of fed monetary policy right now.
Uh, and here's one more thing where I can't prove this. I can't say I know the future. This will happen. But think about what I just said what's happening right now, already flies in the face of exactly what the fed is trying to achieve. So I do think it's very realistic to expect some form of yield curve control.
I know I'm not the first one to mention that I've heard you discuss that with other guests. The fed has bought on the long end of the curve before. So I, I don't see any reason to say, Oh no, no, that could never happen. And what are their alternatives? You know, they're going to go negative on the short end of the curve.
I don't think they want to do that even less. I think the Europeans have that point. I do think the fed steps in here. All right, go ahead. I was saying the Europeans, I think have that already. I think Germany's a 10 year yield is negative. Yeah. Yes. So, and, but that's an important piece of the puzzle you look at, um, You know, any website that tracks, uh, bonds and so on.
And U S bonds, even after the recent increase, there are still, you know, very low, but everybody else's are even lower. Yeah. And so that is a factor. Yeah. It does create some demand for us denominated bonds, and that creates demand for the dollar and that. You know, short-term, it is a headwind for gold. I have a bigger picture here.
Yeah. Picture is we're talking about much higher inflation ahead. Sure. And in my message to the audience is, you know, if you're scratching your head, how can higher inflation be bad for gold? My answer to you is that it's based on a temporary squeezes, an overused word. I don't want to say that. But a temporary imbalance between what's happening with real rates until that inflation kicks in.
I have another theory as to why inflation is a not reflected in gold, the gold price right now. And that is simply due to a risk on sentiment. Now, higher inflation, higher yields that reflect. Um, a positive outlook on the economic recovery, whether or not you agree with that, but that's what investors are feeling.
They're feeling positive about an economic recovery and an opening of the economy. Once the virus has a fantasy subsides, we're seeing that today is a dowel bounce back 600 points. And so during this risk on sentiment, investors are rushing to stocks and liquidating. Some of their state Haven holdings like gold.
What do you think about that? It's a theory, David nobody's ever going to prove that maybe you're right. Maybe there's some small amounts of that, or, you know, there's also the people saying, Oh, it's Bitcoin, Bitcoin's eating Gold's lunch. Everybody's going into Bitcoin. Instead of gold. These are theories.
You're never going to be able to prove that in any systematic way. What I can say is that we have 50 years of data on real rates and gold and the explanatory power, the inverse relationship between real rates and gold. It's much stronger than anything else. Even, even the dollar. Yes. The real rates are more powerful because they, they inform sort of the expectations for the value of the dollar.
And so fundamentally it's the dollar, but the real rates are seen as the driver for the dollar. And therefore, you know, there are times when, um, Saint Haven demand pushes people into gold and the dollar at the same time, we'll see both of them moving up at the same time. There's other factors in there, David, you know, geopolitical uncertainty during times of war, the Iraq Wars, and so on, other things can move gold or not.
And maybe some of it is what you're saying risk on or Bitcoin or anything else. But over the last 50 years, since tricky D closed the gold window, the most powerful determinant in the gold space has been real rates. And those. You know, there's just no way to look at that. That doesn't amount to a bullish case for gold right now, given what you've discussed earlier about inflation, do you still think gold should have retained its status as an inflation hedge?
Like you said, it's ironic. I agree. It is ironic that a should inflation pick up while rates are picking up at the same time while we're going to see as possibly gold glop, which is exactly what we're happening. What's exactly what's happening now. I think these kinds of fluctuations are temporary. I mean, it's more than a daily fluctuation and we've seen cases like just last year in March of 2020, when the markets were melting down, gold went the wrong way.
You had a crisis, you had the kind of thing you would think would push people into buying more gold. And yet gold prices went down. That was just a function of the liquidity squeeze. We saw that in spades in 2008. So I guess what I'm saying is that, from my sense, Given the strength of the relationship between real rates and gold and they don't have to be, you know, crazy whack.
They just need to be negative. And I don't see a scenario where real rates don't remain negative for, for years to come with what's you in front of what you said at the beginning was important, right? It's not the, it's not the level of the right. It's the direction, it's the Delta of the rates. So they could be negative, but again, on the temporary basis.
So if, if real rates are less negative than they were a week ago, that change, that does impact the price of gold. But that's short-term, if we're looking over the months and the years, it's the fact that real rates remain negative. That are bullish for gold. And you look at the, you look at that long-term chart.
There is one it's available for free on my website, independent speculator.com. There's an article called the fed is caught. The fed is caught in an inflation death spiral. So you look at that and that 50 year chart is there and it shows exactly what I'm talking about. You can zoom in on shorter timeframes.
It shows that 2004 to 2007 period when nominal rates were rising with gold. And that's the kind of thing that I think is a mistake. So. Yeah, I mean, on, on a week or even a month, things can fluctuate. Uh, but the long-term driver here I think, is in place and that directional change, right? That's short term that's, you know, days or weeks and the longer term, as long as real rates remain negative.
That's very, very bullish for gold. But let me say one more thing here, David, you can ask whatever you want, but I just have to say this. Um, this is not just a theoretical thing for me. This is what I'm doing with my own money. My, my portfolio is not a model of, you know, Theoretical stock picks that I might've bought or could have recommended or whatever.
It's what I'm actually doing with my own money. And I'm putting my money where my mouth is. I bet on a bunch of stocks last week, when things went on sale, when we get off here, if gold remains under pressure, I'll probably bid on some more. I would love to average down. And if, if gold breaks below 1700 could happen, things will get even crazier on sale.
I look forward to being able to deploy a larger amount of cash. At lower prices and average down very aggressively. What I'm saying is, you know, I think the data supports me and I'm putting my money where my mouth is on that. Uh, you know, I'm not just being a cheerleader and you know, what, if I'm wrong, I will, I will personally lose a significant amount of money for me.
So I'm not just a yeah. You know, thinking about this hard and I'm telling you what I think is true. You touched on my next question is what you will be doing with your own money right now. Would you be buying gold at these levels or would you wait for a pullback? It sounds to me like, based on what you just said, that you might expect more pullbacks for an average down possibility where potential is that correct?
Right. It's that directional change we're talking about. As long as it looks like a real rates are being less negative, right? As long as the nominal rates seem to be rising faster than inflation, that is a potential headwind for gold. But I want to clarify something for what you say. Um, Gold is one thing or gold and silver bullion themselves.
The metals, the physical metals are one thing. And then there's the stocks. Yeah. So my answer to your question is I've already seen this, uh, nosedive down towards 1700 as an opportunity I have already deployed. I've been more, uh, in the last week than I have for months. So I'm already seeing this as an opportunity right now.
Yeah. Who knows? They could turn around tomorrow. Uh, but if it goes on sale even more. I, I, I have cash. I was actually thinking we would see another big market melt down like last March and it never happened. So I actually have a fair amount of cash more than I've ever had before parked on the sidelines.
So I am absolutely ready, willing, and able to substantially increase my positions in what I think are the best gold and silver stocks. If we do break below 1700 in his panic, in the gold space. Let's talk about that. Just to reemphasize the point, sorry. Bullion is different. That's where I put my savings.
I don't, I don't trade in and out of gold and silver. If I stack coins, you know, they're going to stay stacked unless I don't know, I need to buy a house or I have some kind of emergency and I really need to dip into my savings. Okay, let's talk about the miners since you brought it up. Great point. I like to ask you about the relationship between the miners and the equities versus gold.
Now, today is an easy day because both gold and the stocks are up. So obviously the miners are up. I'm looking at the GDX index let's suppose. And you've got a lot of these. You've had a lot of these days in the past last couple of weeks to months where golden equities move in opposite directions, let's say gold is down and the equity indices are up in that case.
With the minors be following the equities or the gold index. Let's say it's a curious thing. In my experience, granted, I don't have as many decades as Rick rule or Doug Casey or some of my mentors, uh, but almost two decades of watching this and, you know, one, the relationship between the equities and the underlying commodities that leverage you get from the stocks.
That's why we're there. That's why we like the stocks. So that's still intact. But what I've seen over the last year has been really interesting on the way up last summer, when gold was breaking North of 2000, you know, 2100, all that excitement, uh, the stocks were not storing as much as you would expect that leverage.
It was there. It was like, you know, at 1.5 X or something, instead of the three, four X that you would usually expect, um, during a big breakout, it was like, Investors in the stocks, weren't believing it. It was too good to be true. $2,000 gold. You know, that that's, that can't last. Uh, and so the stocks were, you know, slow to follow up.
And now on the other side, it seems like the stocks are really resisting. The downward moves. It's like, no, we've got, you know, 18, $1,900 gold. That's a great price for the minors. You know, $27 silver, that's a fantastic price for the silver miners. So one of them fluctuates. I'm not going to sell these profitable companies.
So the stocks kind of resisted on the way up and now it feels like they're resisting on the way down producing that very odd phenomenon that you're talking about. Uh, but overall, the, you know, these are day to day longer-term, uh, the relationship between the equities and the underlying commodities, the leavers they offer is still there.
And if I'm right. You know, I, I expect gold and silver to hit new nominal and real, all time highs before this is over, that implies substantially higher prices and gold and much higher prices and silver. Uh, if so, you know, if I'm right, I think you're going to see that leverage payoff for investors. Very, very handsomely.
Okay. Speaking of inflation, hedge, uh, Lobo, I'd like to show you this chart that I've made, it's, uh, the goal to big Mac ratio. So what I've done was I've taken just number of big Macs. You can buy with an ounce of gold over time. And I took the data for the big Mac price from the economist. They're the ones that put out the big Mac index.
And so this is just an illustration of Gold's purchasing power over time. And what I found is that. Gold spiritual power over the last two decades has held up pretty well around their historic average. And importantly, the purchasing power of gold has peaked in 2011. So even though in nominal terms, gold has peaked last year in purchasing power terms.
It is not how do you read this chart? I think it's another version of some of the charts I've done on gold in real prices. If you inflation adjust gold, it has not hit a new all-time high yet. A couple of things about the chart though. One is you notice that we're only halfway up to the previous peak. So if gold is going to hit it a real new, all time high, it has up.
Much higher price to go ahead of it. The other thing is, as we started this conversation early on, we were talking about higher food prices now, so that a parent, the elevated gold price in big Macs could actually correct as food prices increase they'll at the end of the day, since, since a big Mac is kind of a food staple, I think there's a, a resistance to higher prices and something so basic.
So I'm not sure that's the best comparison. But long story short, it tells the same story I've been telling about gold in real prices. Okay. So Lobo, let's talk about silver. Now we'll wrap up the interview. We spoke offline about silver, uh, just now. And, uh, I know you like silver. I, I w the question I have for you is whether or not you think Silver's downtrend should continue as you know, like gold, silver has seen a decline in prices since they're out, since it's high as last summer.
So are you taking this opportunity to buy more or are you waiting for more poor pullbacks before you go in? Even more short answer is yes, I'm buying now. And if it pulls back more, I will buy more. Because I don't know that it will go down more. We've seen an extraordinary divergence between silver and gold this year, as we all know, silver has its industrial side is much more so than gold.
It responds with gold as a monetary metal, but it also responds to industrial demand and the new energy, um, Paradigm and the demand for silver in the photovoltaic cells is very much part of this sort of green new deal or green recovery. That's being pushed all around the world. So, you know, it's just amazing to see days when, when gold plunks down substantially and silver holds on or goes up.
I think we may see, you know, and worst case. We may see some of that all year long. Uh, but the best case is you have the industrial demand pushing silver up and the monetary demand, pushing silver and gold up, making silver, the win-win metal for 2021. We may even see silver Trek copper, more closely than gold this year, but either way it's, it's something I'm looking to buy more of.
Well, it sounds just to close off the conversation, it sounds like you're bullish on the economic recovery then are you not. Or at least the appearance of the economic recovery, like commodities prices can go up because of money printing, you know, even if people are struggling. So I, but I do think that post COVID shutdowns, we're going to see this spring quote, unleash.
We're going to see lots of economic numbers going up. I'm not alone in that even the fed has already said, they expect that. But it's going to be transient. They don't think that's going to be persistent. So that's the big question longer term is, you know, what happens after the square root? Where does the economy settle?
What is the longer-term impact of all these COVID-19 shutdowns? I'm not especially bullish about that, but for this year, I do think the surge that is ahead visibly, you know, heating up now is extremely bullish for commodities and for monetary metals. And that's where I'm looking to deploy my own money right now.
All right, Lobo. Thanks very much for that update. We'll look forward to speaking with you again next time. Thank you very much. Thank you, David. Thank you for watching Kitco news. I'm David Linn. Don't forget to subscribe. If you're watching this on YouTube.