Episode 45: Precious Metals with Jeffrey Christian

Ben Lakoff, CFA
May 10, 2021
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Jeffrey Christian is the Managing Partner and founder of CPM Group, one of the most respected precious metals and commodities research companies in the world – founded in 1986.

He knows A LOT about precious metals and is well known for his financial engineering work using commodities derivatives both for hedging and investment purposes. He has worked with governments, the United Nations, World Bank, International Finance Corporation, International Monetary Fund, and many of the world’s largest and most prominent mining companies, industrial companies, investment banks, and institutional investors.

Ok, you’re convinced Jeffrey Christian knows his stuff – In this interview, we cover all things Gold. Macro-economic backdrop and why it’s important for gold investors, Drivers for its price, USD as a global reserve currency and possible bearish scenarios for Gold outlook over the next 10 years. We even discuss Bitcoin a bit as a higher beta, speculative play on the gold narrative and some of the issues with that.

Enjoy this episode with Jeffrey Christian.

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Show Notes

0:00:00   Welcome and context

0:02:00   What is your background?

0:05:06   The economic backdrop of where we are

0:07:45   What’s the outlook for precious metals at the moment?

0:11:20   What is your prediction about the future of silver?

0:12:21   Why are investors leaving gold out of their portfolio?

0:20:04   What ranges are you talking about with potential investors?

0:23:45   Is the price of gold manipulated?

0:34:25   What is the future for precious metals?

0:40:07   Thinking around the speculations

0:46:10   Gold vs Dollar

0:48:01   What are your thoughts on Bitcoin?

0:57:56   What are your favorite books, articles, and sources for information?

1:02:25   Where can people find out more about you?

Show Links

CPM Group

Gold Anti-Trust Action Committee

Episode Transcript

Ben: [00:00:00] Welcome to the alt asset allocation podcast, exploring alternative investment opportunities available to the everyday investor. Here’s your host Ben Lakoff.

Hello and welcome to the all asset allocation podcast. Today’s interview is with Jeffrey Christian. Jeff is a managing partner and founder of CPM group.

Which is one of the most respected, precious metals and commodities research companies in the world. It was founded in 1986. He knows a lot about precious metals and is well-known for his financial engineering work, using commodities derivatives, both for hedging and for investment purposes, he’s worked with governments, the UN world bank, international finance corporation, international monetary fund IMF, and many of the world’s largest and most prominent mining companies, industrial companies, investment banks, and institutional investors.

Okay. You’re convinced that he knows his stuff in this conversation. We cover all things, gold, macro economic backdrop, and why it’s important for gold investors, drivers for gold price USD as a global reserve currency, impossible bearish scenarios for the gold outlook over the next 10 years, we even discussed Bitcoin a bit as a higher beta.

Speculative play on the gold narrative and some of the issues with looking at it like that. There’s a lot here and you won’t want to miss it before we jump into the episode, I wanted to take a second to thank you for all the great questions and feedback I’ve been getting you guys really rock. If you’re getting some value from this podcast, please drop me a line or give me a review.

These things really, really help. And I appreciate it. Okay, let’s kick this thing off Jeffrey Christian on precious metals, Jeffrey. Welcome to the show. Excited to have you on today.

Jeff: [00:01:51] Thanks for having me your event.

Ben: [00:01:54] Absolutely. We’re we’re on the other sides of North America right now. Before we jumped into all things precious metals and economic outlook wanted to start off with your background and what you’re doing now.

Jeff: [00:02:06] Well, I started off, you know, in university I studied journalism and international economics and the international economics was in the political science. I was interested in how communist countries trading, thus the Soviet era poster behind me. That’s from 1975, 76, and I was interested in how, what we call back then transnational corporations interacted with developing countries.

A lot of that work with China and Russia Soviet union back then, and in developing countries was raw materials, natural resources, commodities. So I did a lot of work in oil and gas as well as moon and precious metals and stuff like that. Got out of school, moved to New York and was a business journalist.

I actually wrote a book and a newsletter on electric vehicles in the 1970s. The gist of the book was that these things are decades away because the battery technology is not here. So I’m getting into metals. And I pivoted into metals research. Base metals as well as uranium, which I had studied on energy and precious metals.

And after a while I got tired of being a journalist and I went to J Aron, which was a independent commodities trading company, one of the top 12 precious metals companies in the world of the largest coffee producer. And I B I, I started running their commodities research group. It was very unique in that they had a commodities research group that did fundamental research.

Most people don’t have that. And actually at the time they were one of two companies that did fundamental research on gold two on silver, and no one did platinum group metals until I started at J era, we merged into Goldman Sachs in 1981 in 1986. I could see that Goldman was sort of. Arguing among itself about the wisdom of Spain in metals.

So I offered to spin out the commodities research group that I was running set up CPN group as an independent commodities research and consulting company. And, you know, they could buy as much research and consulting time as they want it. So they outsourced their commodities research for a few years to CPM group until they get into a hissy fit.

And so for that 34 years now going on 35 years, we’ve been an independent research company that specializes in precious metals and financial engineering of commodities for producers, consumers, intermediaries. And institutional investors ranging from family offices, pension funds.

Ben: [00:04:44] We started recording. You mentioned that you had a debate in the eighties and that the guy said that Jeff was not good at predicting gold prices. You were good at predicting economic cycles. I think with commodities and precious metals I’d like to start there, the economic backtrack drop of where we are.

Cause I think that will be a good bleed in to when we get into gold and other precious metals.

Jeff: [00:05:09] It absolutely does. And, and it wasn’t actually a debate. It was just some journalist asks this guy, any criticism, but if you look at gold and you study it analytically and you think critically about it, and you do econometric modeling and studies as we’ve done since the late seventies, early eighties what you find.

Is that the primary factor driving golden pricing is investment demand and investment demand is driven by a variety of factors, almost all of which are not gold fundamentals, but rather macro economic and political trends. So when you start saying, well, you know, where’s the price of gold going to go?

Yeah, you need to look at mine production and secondary supply and fabrication demand and central bank activity. But the key thing is what’s happening to the drivers of investment. So we’ve spent a lot of time on the stock market, the bond market, currency markets, overall economic conditions. And we have a really good track record of calling that as well as calling metals markets.

And if you look at some of our competitors, they generally speaking, don’t have that macro economic background. And they have a very superficial view of the world economy as do most people. I mean, if you just read the internet and you see that so I think one of our strengths has always been that we pay a lot of attention to the global economic and financial markets, and that really has a heavy flavor in our model.

If you look at the econometric models that we feel for full pricing you know, the bulk of the independent variables are macroeconomic.

Ben: [00:06:54] Yeah. That makes a lot of sense. And the reason why people have such difficulty. Comprehending. This is because there’s so many moving parts and it’s not just perhaps you’ve captured it in your models, but with a number of these variables, but there’s quite a bit of them and some are contradictory and some are moving all over the place.

So it’s certainly a lot of noise. And on that topic, I mean, there is a lot going on right now. This is being recorded in January, 2021.  Let’s talk outlook for the metals, precious metals market, knowing that investment demand is driving a lot of this. And then obviously we’ll talk about the supply aspect, but  what’s the outlook for these precious metals right now?

Jeff: [00:07:38] Well, we’ve seen an incredible 2020 with gold and silver prices, rising sharply and a lot of other things going on. And our expectation is that 2021 2020 will be a period of. Economic base building. We don’t necessarily see a very strong recovery. We don’t necessarily see a major move up or down in the U S dollar.

We think there are clearly pressures on us treasury interest rates, but by the same time, the fed will work very hard to keep interest rates down in order to help stimulate and foster an economic recovery. So our expectation has been for some time and continues to be the 2021, 2022. We’ll see rising gold and silver prices, but much more moderate over the next couple of years then they have that longer term.

We look at this plethora of economic and political problems that the world is facing. Look at the enormous amount of sovereign debt that the United States and other governments have taken on. And we’ll take one. In 2021 and probably into the foreseeable future. And we think that there will be a major economic and financial spasm.

At some point it will start in some obscure corner of the debt market. You know, in 2007, it was the collateralized mortgage obligations. Last year it was, I can’t remember what it was last year. But you know, it was quite clear that it was esoteric one of the market. I

Ben: [00:09:11] think the repo market,

Jeff: [00:09:14] the repo market was, was part of it.

And and again, you know, these are areas that people just don’t understand really, you know, they’ve only paid superficial attention to it. They, you know, if you’re in the financial markets, you know, it’s over there, but you’ve never stopped to really study it and, you know, love it. One of the things that we’re looking at is the balance between underlying equities.

But a a hundred trillion dollars in underlying equities and equity derivatives, which are in the quadrillions of dollars. And, and, and, you know, is famous, you know, bankers will say, well, that all nets out. Well, it only nets out if it nets out simultaneously. And it does not net outset simultaneously if in one company goes bankrupt somewhere in that Daisy chain, you got problems.

So we think that there will be major economic and financial spasms possibly in the middle of the decade. And that that could cause investors to jump back into gold and silver, and the prices go to record prices significantly higher than the record prices that we saw in gold last year. And that we saw in silver in 2011, 2012,

Ben: [00:10:26] Yeah, that that makes a lot of sense.

And then the outlook for something like silver is a higher beta version of that, or also the industrial applications. How, how does your, your outlook look for something like silver?

Jeff: [00:10:41] Sure. Yeah, like I said, you know, we expect some prices to outperform, partly because they’ve underperformed. You know, they’re, it’s a far less liquid market than gold.

There are fewer participants it’s less geographically dispersed than gold investment demand as a much smaller market in terms of the value. It’s probably one 10th of the value of the gold market, so that you see a much less liquid market. And when the prices start rising civil law pay scope, and when the prices are falling, as they were from 2013, till a couple of years ago civil law pace go of on the downside.

Ben: [00:11:18] Yeah, that makes a lot of sense. I I’d be curious your take on why, I mean, precious metals, gold and silver are, are under owned in asset allocations across the world. Right? Well, I mean, and partially this is driven by the inflated asset prices of the other assets within that portfolio, but  why you think investors aren’t really viewing gold as an integral part of their asset allocation?

Is it because we’ve been living in this all asset prices going up and it’s just a relative game or I’d be curious to hear your thoughts.

Jeff: [00:11:58] Hey, there are several factors. One is the tremendous rise in equities in a. Largely non-volatile fashion for the last 10 years. I mean, we had a couple of spasms last year and then a couple of years earlier and you had a spasm in 2015 in China, but if you look at the S and P and the Dow Jones from 2010, these things have been rising very steadily with extremely low volatility.

So it’s an easy dude. I think that’s one of the factors. Another thing is that it’s financial intermediaries, you know, the market makers and the banks and dealers find it much more easy to sell and market and trade stocks and bonds and currency than commodities. So commodities tend to get underlooked.

The third thing is that commodities, including gold and silver have a fundamental underlying part that most people including the banks and dealers do not understand. And as you know, when I was at Goldman Sachs, we had a partner who famous the, the, we were creating Jr in petroleum. And they’ve made a pitch to the executive committee to trade some oil and gas based on a proprietary, fundamental model that we would build.

And Rob, and the head, the partner in charge of commodities and currencies shutdown proposal and said, no, if my traders have to stop and think about a trade before they make it, they shouldn’t make that trade. Cause he w he came out of a bombs and he was all arbitrage. Yeah. And as we were leaving the head of Jr and petroleum turned to me and said, where are you going?

Because India was a clear, you know, this is a head. Another Goldman anecdote, you know, after I left Goldman, I used to go to these Christmas parties with XCOR when people and I sat down, I’ve got li you know, I always get there late. It got there late one year. The last year they had. And, and someone said, how you doing Jeff?

And I said, you know, I’ve been thinking Goldman was the least intellectually challenging place I ever worked. And a former an economist who had worked at Goldman with me said, that’s not fair, Jeff, it’s an investment bank. Yeah. So you have a financial system that’s not geared up to deal with. Complex things that involve fundamentals.

And we, you start saying, well, you don’t have to pay attention to the secondary recovery. These guys say, no, I don’t because I’m going to trade stocks and bonds, you know? So I think that’s another thing. I think another big factor is that because those guys don’t want to trade these things, they don’t market them.

And that fills a space because commodities, especially gold and silver are largely unregulated compared to financial, other, other financial assets that fills a space with people who are not regulated, who are not have a passed the test that shows that they have any financial sensibility. Clearly didn’t even take banking one Oh one money and banking one-on-one in college because they have no concept of money and banking.

And they say a lot of terrible things of that, or fundamentally, and obviously Wong. They’re ignorant of the facts. They lack critical thinking, and they have these beliefs that, you know, they act on beliefs. And so, you know, it’s funny cause you catch yourself and say, no, you don’t think that you believe it.

Yeah. If you thought you wouldn’t believe that, but you’re not a thinker, you’re a believer. And that turns off a lot of investors. I mean, it’s not uncommon for us to have wealthy individuals or family offices come to us and ask us to help them build exposure to go and silver and we should talk about the allocations in a second.

And they’re very apologetic and they want us to know they’re not crazy, you know? And they’re coming to us exactly before, because we’re not crazy. Yeah. A third Goldman anecdote the day that. Goldman announced it was buying J arrow. I became a Goldman employee and I was sent over to have lunch with Leon Cooperman.

Who’s the head of investment research. And Gary went blocky, who was the chief economist, and I was going to be reporting to them. And as a young kid, I didn’t know who these guys were. And, and as are shaking hands with Leon he said, I want you to know I think gold is a religion, not an investment.

And I was the most vociferous appointed to bind Jayer and on the executive committee. And because I was naive, I said, well, sir, I agree with you that for most people, gold is a religion, but we’ve done a tremendous amount of quantitative research. I think that you will be impressed to see that you can invest in.

So in gold on a quantitative analytical basis, even though its product with religious believers and Leon said, no, I won’t be. But I think that the presence of all this nonsense. In the gold and silver markets turns off a lot of people. I know that because I have, as I said, I have investors coming to me and they say, well, we looked at a report that you did.

And this goes to the allocation thing. You know, the optimal diversified portfolio, 1968 and 2020 had 25, 30% of its assets in bold, you know, on a global basis. Private financial wealth has less than 1%, about half of a percent in gold. So you find these people, the thing about, I heard your speech, or I saw your report, or I’d want your gold yearbook.

And, you know, I saw that, that efficient horizon chart, nothing. Okay. I’m scared about the world too. I want to have my portfolio in my wealth diversify. I should have some gold, if not golden silver in my portfolio, let’s use CPN group to build it. And the first thing they want to do is they want to explain to us that they’re not part of the fringe.

Ben: [00:18:09] Yeah. Oh, I love it.  The believing versus thinking, but a thought on that is that, I mean, ultimately the, the, the argument with the gold as a religion is money’s kind of a religion as well in a way. It kind of fits into that overall picture. And it’s an interesting concept on the lack of licensing.

And, you know, you don’t have to have your series seven or whatever to sell gold. And I was just, I did a beach workout on Sunday and I met a golden silver salesman. This is like, you know, he’s like, we, we go around and say a little intro afterwards, come, come talk to me. If you want to, you know, hedge your portfolio and buy gold and silver,  Hey, it is what it is.

I think those are all very valid points. And you mentioned a bit about portfolio allocation when talking to the average investor, you know, less than 1% I mean, is, is there, it’s very tough to give these broad brush assumptions, but like if people are worried about the economy and they they’d like some gold and silver, I mean, five, 10%, is this adequate again, very hard to give broad brush advice, but I I’d be curious when kind of, what kind of ranges you’re talking to people about?

Jeff: [00:19:19] Yeah, well, we, you know, we took the Ibbotson model it fits into the model and looked at the efficient horizon in the early 1980s and said, Oh, five to 10% of your portfolio should be in gold and no one updated it until. We did around 2015, 2016, 2017. And we found that, you know, when you added all those extra years, he went from 68 to 80, because that’s the data that you had on frequent press.

We went from 68 to 2017 and now 2020. And when you add all that in suing years and volatility, you see that it’s, twenty-five 30%. We never really recommended that much of your portfolio in gold until we did that research. Now we realized that that probably does make sense, but yeah, it depends on the individual investor.

One of the problems is that announced bolt is $1,840. Yeah. And something like 80% of American households can’t afford announce a boat. Right. Cause they need that money for food or gasoline or rent. So that, that really turns off. Smaller investors in the United States, Europe, Japan in other countries like Malaysia, Southeast Asia, South Asia, China, you’ll find that they have these little one gram wafers and people will actually, you have a much higher incidence in gold ownership.

But you know, the reality is that, you know, you should have some gold and probably some silver in your portfolio, and it depends on who you are, how much you can afford. And if it’s one ounce of gold, but that’s like 40% of your savings and might be okay. Yeah. I don’t advise people to buy less than an ounce because the premiums are just so high.

And then, you know, there’s silver, which is cheaper per unit. So you can do that too.

Ben: [00:21:02] I always advise physical ownership as opposed to exposure through paper gold on ETF sort of thing. I mean, always is a very strict word. I, I get, but you recommend.

Jeff: [00:21:14] What we do is, I mean, we, we, our view is that you should have a diversified portfolio of gold assets.

So you should have some physical gold or silver and our silver, which is an insurance policy. It’s a wealth protection, it’s a portfolio protection and diversifier. It’s a diversifier of the denominator of your wealth. It’s a diverse supplier of the numerator of your wealth. And it has a lot of values, but that if you have the financial wherewithal and sophistication, you have your physical gold as a long-term insurance policy and investment, but then you can also have futures options, ETFs, equities, mining, equities, as things that you trade back and forth on a more opportunistic basis.

Ben: [00:22:09] Gotcha. That makes sense. Your strategic allocation sitting in physical somewhere very safe and then tactical moves in and out on these more liquid instruments. Talking about the more liquid instruments I’ve done podcasts on minors and silver and things, but more on paper gold.  I’ve heard you debate this topic before.

But well even no further up with just gold prices in general. One thing that I’ve heard when I’ve talked to people about investing as gold is they say, Oh, the price of gold has manipulated. And of course,  it’s like we were talking about earlier. It’s a belief. It’s not really, they’re not thinking through this or analyzing the data.

But what is your response to somebody saying that that the price of gold is manipulated by the big banks and the central governments? What do you, what do you say

Jeff: [00:22:56] there’s no basis for it? I mean, if you look at those a funny, because in 2009, I actually have a very good friend in California. Who I met because she sent me an email and she said, Ghana is sending this notice around that.

They’re going to challenge you to a debate. And I said, you know, who are you? And we became depressed. They never actually challenged me.

Ben: [00:23:16] And, and yeah, data is gold, antitrust action committed, committed. Right? So just for people to know, I had to look that one,

Jeff: [00:23:24] they sent this note around saying, you know, we’re going to challenge you, Christian, here are the six things we want him to refute.

And so send us money so we can prepare for this. Well, they never did. And Bernard Lowe, who was anchor at Bloomberg TV at the time said we’ll hosted the debate. And, and, and, and they, you know, they never did it. But then the following year, they were causing a lot of problems for banks and brokerage houses and depositories.

They were paying people or not. They weren’t paying people, but people who paid them and supported them were paying other people to go around, say, Oh, I went to see my gold at Scotia bank. And there was no gold at the bank, which is nonsense stuff. They brought out this guy who was actually a car leasing agent, but he was a fabulous, like Walter Mitty.

And he said that he had worked at J Aron and he knew how the conspiracy works and they grabbed him. They didn’t check him out to see they, in fact, he never actually had been a trader at a bank. He was a car leasing agent who probably leased cars to some of the guys, wouldn’t be a lot of money trading gold.

And they put him out there as, as a person and stuff. So a number of groups came to us and said the bank, these guys. So we put together first audio debate in 2010 and then video debate the Kitco broadcast in 2011. And they started both times. They said, well, here are the six things you want to, you have to refute, let’s re let Jeff respond.

And I reviewed him. You look at their evidence and it doesn’t hold up to intellectual scrutiny on even the most basic level. Then you look at evidence in the market and you can say, okay, I can see that there are guys who manipulate around the market. You know, they, they, they do a spoof trading and things like that.

But there’s no conspiracy, no grand conspiracy, no small conspiracy. It’s yeah. It’s traders. And you see that kind of spoof trading in every market in the world. You know, you see that in the vegetable market in Morocco. So you don’t see any evidence supporting that. You see a lot of evidence that, that doesn’t support it, that you can knock it down and then you stop and say, well, wait a second.

It doesn’t make sense for these guys who want to manipulate the press. Yeah. So they actually have greater value in higher prices. Yep. There was a group in Canada that was trying to promote its own silver ETF and it was charging people a 25% premium over on prices and getting them to buy it because their thing was, you can’t trust, HSBC and Scotia, but you can trust us because we’re like a basement boiler room operation in Canada.

And, you know, so give us your still. Yeah. And it was just, it was just incredible. And then they start this thing, that’s it bankrupt JP Morgan by Sylvan drive the price up. Now, if you think about how a bank trades banks make money at the margins, you know, it’s like, I’m going to take five basis points for every checking right now.

And, and. If I’m a bank and I’m leasing from a bank, Bob and bullion, my major business is leasing metal out under these metal out to re producers while it’s being processed before it’s still under, they meet these metal to smelters and refiners, at least metal to fabricators semi-fabricated jewelers.

Yeah. Electronics companies. So my major business is leasing metal to the industry for me to lease metal. I buy it and then at least, and then I charged at least, right? Yeah. Let’s say I charged 3% for bowl. Oh, that’s really expensive. But there’s a lot of costs to leasing out to these smaller jewelers and such.

And bear with me it’s a little bit long, but you really have to understand this. So let’s say at least go that 3% and the price is $600. Now I’m making 3% of 600, no investors come in and drive it to 1200. I’m leasing it for 3% and it’s stupid than a 12 month now. It’s 1800. Yeah. So when they said let’s bankrupt, JP Morgan and the price of silver actually got up to about $50 about that time.

JP Morgan reported its greatest ever golden silver profits that year because it was charging 3% on $40 instead of $15. So the year before and these guys it’s like, it’s like debating so many other things that, you know, Eric Hoffer who told him going to term true believer said, you cannot convince a true believer that his beliefs are wrong based on evidence and fact and observable reality because that’s Harrison.

Yeah. So you don’t waste your time with those people, but you know, just, you know, Taking a bathroom break and thinking know, or reading a book on money in banking or asking a professor at a coffee shop, you know, you say, Oh, wow. Okay. I just totally don’t understand it. Now. Some of the guys don’t do understand it, but they’re in this cottage industry of marketing, conspiracy, or marketing precious metals based on conspiracy or marketing bullets based on conspiracy.

Ben: [00:28:45] Yeah. You look at their incentives, right. And figure out why, why they’re touting these, sorry, continue.

Jeff: [00:28:53] Well, we break it into three groups. There’s the guys who were, this is their business and you’re never going to get them to stop until they get busted for lying to their clients. And I don’t think that that’s a crime in most parts of the world.

Except maybe China. Then they’re the true believers who you can’t believe. You know, you want me to, you want me to convince you that there’s no goal conspiracy, let’s get you a good psychiatrist because what your belief system is based on has nothing to do with the gold market or the global economy, or a deep state people that don’t really exist.

It has everything to do with something in your amygdala. You know, we have to work on that. And then there are a lot of people who are educatable, as I said, in an interview a couple of weeks ago, and they look at the world and they say, well, there’s some stuff that’s kind of crazy. Yeah. All this money that’s going on in the fed.

And yet it’s not gone down to consumers and small businesses, it’s going into the stock market, you know? And, and it’s like, well, why? And people say, well, okay, I don’t understand. You have negative interest rates in many parts of the industrial like world. Now, why would anybody pay a bank 25 VIPs. To hold their money.

Okay. Well, first off the government gave them that money. So 25 bips that’s kind of cheap. The second thing is you’ve got it in your research and you can use it as so Advil for 6% or 12% return. Well, collateralized debt obligation. So if you, again, you look at it, say these banks are in tight waters and the monetary authority has given him all this money and they’re reporting record profits.

And they’re they they’re reporting record profits with a record amount of assets dollars in the bank. They’re not lending that money out. Gimme thanks. Since 2008 have had trillions of dollars of excess reserves, whereas for all of the history of the Republic, up until 2008, They never had excess reserves.

If you were a bank and you had excess reserves at four o’clock in the afternoon, you found someone to loan it to by five o’clock, it’s just the way it was. You know, and if you understand that, then you can start understanding banking and you can start understanding how it is that this is going on. But there are a lot of people who look at it as they’ll give me some scraped, crazy things going on.

And, you know, you take a criminal truth about these things, and then you wrap it around a bunch of Cramo and most conspiracies have some kernel of truth at their basis. So somebody can say, yeah, I don’t quite understand what’s going on with money. I don’t understand why the economy is as bad as it is. I don’t understand why that guy can afford a a hundred million dollar house in Malibu.

And I can’t so There are a lot of people who look at the world and say, I just don’t quite understand this. And then some guy in his Hootsuite comes along and says, well, it’s because there was a conspiracy. Let me tell you how it works. And rather than find a college professor who could teach you about money and banking, you’ll listen to the guy in the Hootsuite.

Ben: [00:32:02] People want easy answers to hard questions. Myself included everybody, right? It’s like, you, you don’t want to do this second level thinking and understand the whole global economy and the banking system and how it fit currency was created and how the fed works. All of these necessary, fundamental building blocks to understand, okay, print money, asset prices go up.

You know, there’s a lot more than just that. But I think that’s helpful because this, I also think is a bit of a headwind when people say you know, they come up with all of their own excuses for why they don’t want to invest in gold and because the price has manipulated it is another one that seems to come up a lot.

Talking about the economic world that we live in I mean, it seems like all roads lead to. Some sort of massive change at some point and gold having more value. It’s not a matter of if it’s a matter of when. If not in the next five years in the next 10 years, I would think that things, this gold precious metals in general, real assets would have a significantly higher value.

What scenario would firstly, do you share that opinion? And secondly, what, what scenario, what, what actions would change your mind about that sort of thesis?

Jeff: [00:33:31] Yeah. I share it with some, for visas. Yeah. Our view is that we would not be surprised to see the gold price average around $2,800 an ounce some years.

Now the last time in 2011, 2012, the price got up to 1800, $1,900. And the average was something like 16, 20, right? So if we’re saying that we’re looking at an average price of 2,800, we’re looking at price close to $3,000 at some point, and, and there are various economic scenarios that we’re looking at the proviso is that we feel very uncomfortable with the crowd that we’re in, because a lot of these guys have been saying this can’t last since at least the 1970s, 1980s, and they’ve been wrong.

Yeah. And the reality is that monetary policy and fiscal policy and the whole  of international economics have changed dramatically. And this can go on for a long period of time. And the guys were saying, Oh my God, look at all those money creation. This can’t last. This has gotta end in fire. They’ve been saying that since at least the Carter administration and some of them were saying it like in the fifties and sixties,

Ben: [00:34:53] I bet they might be right on a long enough timeframe.

Right. They just got the timeframe rock.

Jeff: [00:35:00] It’s funny because we have clients who are acquiring dealers and wholesalers and retailers, and they say, you know, I get this letter from applying and they say, you know I get like my children say, you know, dad, you’ve been listening to so-and-so for 40 years and you’ve been squandering our inheritance.

You have to stop listening to it because you just, you know, you’ve missed the two biggest bull markets and stocks and the two biggest bond market rallies in history, and you buy gold and, you know, you bought physical gold and you put it in a ball and it’s now worth twice as much on it on a real inflation adjusted basis as it was when you bought it 50 years ago.

Yeah. You know, dad, please stop. So yeah, so I have reservations because. On the one hand they can go on obviously for a lot longer than many people believe they already have, and they could go on further. And I can dwell a very interesting scenario in which the dollar not only does not disappear fall apart, but actually recovers all of its former glory and strength as an international currency.

I can easily draw that picture. Economically, you know, what’s lacking is the political will to do the things that need to be done.

Ben: [00:36:19] I’d love to go down that path after this, by the way, that would be a very fascinating, and in contrary to a lot of other people on this podcast, their opinion, you know, so definitely want to tease that one out.

People will say,

Jeff: [00:36:30] no, you’re always so bullish on the dollars and no, I’m just less bearish on the tower than I am on every other currency because the dollars are recipient and the dollar has some exorbitant privilege. And seventy-five percent of private wealth in the world is denominated in dollars and 62% of central bank foreign exchange reserves are dollars.

And if you owe the world enough, you own. So the dollar has a treatment, this momentum, and, you know, you got to think about current account and the balance and on the balance, the dollar still has this tremendous power. The problem is that on the current account, patients were really trashing, but that current account can be turned around.

As Clinton proved for four years, when he paid down a trillion dollars of debt. No. He ran a trillion dollars in surpluses over four years and paid down a trillion dollars of debt in the last four budgets that he ran. So it could be done, but the political will is not there. At least there hasn’t been up until now.

Ben: [00:37:33] The numbers are just getting so astounding, right? I mean, we’re going to create another couple trillion dollars of debt and this quarter alone. And, you know, it seems like the perpetual motion machine that you just can’t stop at this point. And I get the 75% of private wealth, 62% of foreign bank reserves.

But it appears that this is shifting, you know, you get these clickbait articles about Russia storing more in euros now and more in gold and their, and their federal their reserves. But yeah, I mean, I, that, that’s a very interesting viewpoint.

Jeff: [00:38:06] Yeah, it is. Well, yeah. I mean, if Russia as again, you know,  yeah,

Ben: [00:38:17] but I like it.

Jeff: [00:38:18] I speak Russian. The, I was in 2010 and I was put up in a apartment building by my hosts. And I went to this local restaurant and as I was walking in this guy said something rude to me thinking that I was an American and I sat down at the table and he came in, he had been outside smoking with his friends and he came over to the table and he leaned over and he sits on the, in some language.

I don’t no idea which language, but you could tell from the way he said it, that he was trying to pick a fight with me. And I, I stood up and in Russian, I said to him, do you speak Russian? No, that’s a pity because now you will know why I’m beating you. And. Awesome. You have no idea what I was saying, but he knew I was speaking Russian and the look on his face when he said, Oh shit, I picked on a Russian, not an American.

His friends grabbed them and ran out of the restaurant. No one chain that we have is no one looks to Russia as a role model, except maybe Donald Trump China’s role model. Russia has been buying a lot of gold. He’s got sanctioned. Most of their re foreign exchange earnings or energy for oil and gas.

They, they, with the price of having been hired prior to prior to April, they had a lot of money coming in. They want it to sterilize it away from the dollar a year old. They bought both. China and their gold reserves as a percentage of their total reserves will sharpen their foreign exchange reserves falling as they were buying gold.

So they now have, I don’t know, 20% of their reserves. And so in gold, China has walked probably even more gold over the last decade and their reserves of gold as a percentage of their foreign of their monetary reserves has probably gone from like 1% to 1.8% because they have this massive economic machine and they’re continuing to bring in foreign exchange reserves and they don’t necessarily sell their, their base to buy gold.

They’re taking their current flow, their current account, inflow of dollars and buying Goldman. Yeah. So I think China is a better example of of where it’s going. Yeah. But yeah, we’ve definitely done a tremendous amount of damage and it is repairable clean show that it was repairable. And, and I remember in the nineties, there are people’s bank of China economist thing, you know, we, we gotta do what you guys are doing, which is to be self sufficient in terms of the, the fear of large numbers.

Yeah. These are enormous numbers, but one of the reasons why so many people hold dolls, and one of the reasons why the dollar has held up so bad is because the us economy is so incredible compared to everybody else’s economy. I mean, we have, we, we have natural resources. We have land resources, we have agricultural resources.

We have employment. People want to come here to work. They want to come to Europe. To get to here. No, they want to go to Europe because they got to get out of North Africa or the middle East because of being slaughtered. They wouldn’t come here because they will work. And we have a, you know, we used to have eight or nine of the top 10 universities and people from around the world wanted to come and study at the United States.

Now we have probably about six of the top 10 universities. We still have a tremendous amount of installed capacity across all of those different assets. And we still have a potential for attraction, but in the last four years, eight years, 20 years, we’ve really done tremendous amount of disservice in damaging our reputation and telling these people, Oh yeah, I know that we have great universities and you know, 80% of our graduate students are foreigners, but you can’t come here anymore.

Yeah. It’s just, you know, really stupid behavior. And you have to say, well, gee, you know, are you following the Russian model? Are we all going to be eating onions and cabbages? Because that’s where, that’s where this leads, you know?

Ben: [00:42:37] Yeah. Well, I mean, it’s, it’s hard not to say this time. It’s different because it certainly feels so different with MMT talks and all of these new ways of thinking about this.

It’s just, it’s, it’s hard for me to look at parallels in history and reapply those to what’s happening now, because it does feel like we’re in this brave new world of theoretical testing, you know, and these beliefs about certain things are certainly pervasive and it’ll be, it’ll be very interesting to see where they go from here.

That’s for sure. On that topic, bullish on the gold narrative. But  I’ve heard you say before that gold, it, it’s less about the dollar depreciating against gold and it’s more of gold trades at as almost a pseudo currency against other currencies, but it sounds like you could be a little bullish on the dollar longer term or at least see a scenario.

But how do you think through, you know, gold versus dollar in your portfolio, especially if it’s at negative rates.

Jeff: [00:43:44] If I recall correctly, the statistical correlation in changes in real dollars change rates versus real old pressed changes in real full presence that the over the period, you know, 50, some odd years of 1968, the correlation and not the month changes in those two variables is something like 30 to 33%.

So two thirds of the time, golden. So golden, the dollar may be rising together or falling together or, or not, not moving in opposite directions. So I look at gold as yeah, gold trades against the currency model. If you believe in the dollar and you’re bullish on the dollar, you move your money assets into gold.

If you are bearish on the dollar, but you’re bullish on Europe, you move your money into Europe. And when you look at the United States and Europe and Japan, other purveyors of convertible currency, then you say, Melissa, then you buy gold and silver, if you say, I’m just going to put some money over here and gold and silver until I have a view as to where it’s going to go.

Ben: [00:44:59] Yeah, that makes sense.  It’s all relative game.  I am bullish on this gold narrative. And we talked before we started started recording, but you had done a debate between some Bitcoin maximalists and some some more gold bowls. And you said as a result of the conversation, one of the Bitcoin guys said, Hey, I think this gold thing actually makes sense.

I’d be curious of your thought Bitcoin as a potential gold alternative, I’ll be at highly speculative, higher beta play, but just curious your thoughts on Bitcoin overall as an investment.

Jeff: [00:45:33] Oh, before I talk about my thoughts, my clients, you know, my clients buy gold assets over assets and they hold that they, some of them trade cryptocurrencies, but they tend to go home flat.

Yeah, it’s a speculum tip type of thing. And on a short-term basis, you know, Bitcoin’s at 30 or $40,000. That’s like buying Tesla at its current price. You know, Tesla’s current PE ratio is difficult to calculate because it hasn’t had earnings for a couple of quarters, but yeah, it’s like 2,700, you know?

So then you know you to buy Tesla at current prices, you have to believe that you’re going to hold this for 2,700 years buying Tesla at these levels of speculative play. You’re following the parabolic move. And the same is true for Bitcoin, but that’s on the short term on a longer term basis. I think cryptocurrencies are the antithesis of gold.

Gold is a tangible asset. With a, which is nobody else’s liability. You own it, you can hold it, you can have it stored wherever you want either in your control or in the control of somebody that you trust. And it is geologically finance. I mean, there’s an enormous Monaco a lot there, and, and there’s enormous amount of gold that’s refined in the book ground, but there is a geological finiteness to gold supply, actually probably pretty much meaningless, but because people think it’s important, let’s say national currency, you gold value is based on the faith in gold in 1999, 2000 when Clinton was running $320 billion surplus.

And and the dollar was skyrocketing. Gold was $270 now. Now it’s $1,800. Yeah. It’s the faith in gold that determines the value of both national currency. It’s the full faith and credit of the national government that’s doing it. They say, no, we will be responsible in, in supplying currency, but they can increase it really, you know, at their event at their discretion.

So it’s internet, it’s kind of meaningless the piece of paper and it’s somebody else’s liability. Cryptocurrencies have actually, they are somebody else’s liability people. You don’t know who they are. Right. You know, and they say, Oh no, it’s a finite limit. We have these rules in place that we won’t increase it over a certain amount, but those are the same rules that you built that governments build for their national currency.

And you can, with a couple of clicks on your keyboard, change the amount of cryptocurrencies that you want. Oh, well, we wouldn’t do that. Well, you know, governments used to say that about their money too. And in the 1860s, when we didn’t have a simple bank in the United States, in the 18 hundreds, you know it was up to individual banks.

You would give them your, your gold and silver to store and they would write notes. Thank notes, based on the fact that they had that. And then they realized, Oh my God, there are no federal auditors. And the state auditors are all drunk or fuck it. So I can write as many bank notes as I want. And you had bank run and bank panic and bank scandal after scandal.

The best book on the us monetary system in the 18 hundreds is called the nation of counterfeiters. And the counterfeiters were the bankers because they could just print money, really milk and, and cryptocurrencies are sorta like that. They. Have an infinite, a mom there based on the faith, in an anonymous entity, that’s created them and they say, Oh, well, we created it.

But now it’s often the Ayana sneer and we had no control over it, but they do, they do have control because they have the code and they can create more anytime they want. So they’re not infinite there. I mean, they have infinite supply. They’re not finite supply. They are somebody else viable. You just don’t know who they are.

And it’s based on the faith of an anonymous person. So I see cryptocurrency sort of as the antithesis of goal. Now I do think that cryptocurrencies as a concept are here to stay. But I think that if you fast forward 10 years or so, the cryptocurrencies that will have that real use will be national currency that have been printed.

Ben: [00:50:12] Yeah. And there’s actually been tremendous headway so far at like towards the end of Q4 2020, and January, 2021 of regulations paving the way for like these stable coins backed by the dollar to be used and held by banks and all of these things that are, that are actually moving quite a bit of adoption.

I would definitely argument argue. It sounds like the main argument is that the rules can be changed regarding supply. And I told you, I wouldn’t debate this too much, but and, and that’s fine. The argument there is that there’s so many people looking at this, that it’s it, you can’t tamper with it because of the, the, the network.

That’s validating this and the amount of investment on it, but it made me start thinking of you know, something that Jim Rogers always says is that the main lesson to learn from history is that we don’t learn from history. And just coming up with, you know, people fiddle with the supply to, to, to make money is that perhaps instead of adjusting the supply of something like Bitcoin, that everybody’s watching, that everybody trusts and the longer this thing goes on, the more that it’s trusted, that it won’t be changed is that if they’re fiddling with the supply of something else, say one of these stable coins and using that to pump up the price of the finite supply one, a Bitcoin, then this could be a kind of smoke and mirrors pump fake way of no, no, no, we’re not adjusting the supply.

Look it’s fixed. And you know, look, look at the birdie kind of thing. Because you know, history, history has a way of repeating itself. That’s for sure.

Jeff: [00:51:47] Yeah. For every thousand people who are seeing, if their computer is trying to legitimately trade cryptocurrencies, there are probably a hundred thousand people trying to figure out how to gain it, and they must speak


Ben: [00:52:01] large bounty at this point.

And it gets bigger and bigger every day and there’s more and more buy.  I’m bullish on it. I see it as a more speculative play on gold. I do see similarities to something like gold because of the fixed supply and, and stock to flow and algorithmic distribution of new coins and things like that.

But it certainly has had a heck of a run these last couple of months and it’s making me rethink, you know, position sizing in a, in a portfolio that’s for sure.

Jeff: [00:52:33] So did tech stocks in 1999, 2000 and, and collateralized mortgage obligations in 2006, you know we had a guy who contacted and hired us.

He had sold a company, he had inherited for $300 million, really nice guy. And he so he had a major brokerage health that managed the sale and he got like 300 more than $300 million. And they said, okay, well now we’ll help you manage your $300 million. And he said, okay, I want to buy $10 million in gold and platinum.

And, and this was during the tech boom. And they said, well, we have this new tech fund. And, and he’s not really, I don’t understand that stuff. I don’t want to understand it, but okay, I’ll take 10 million. Now, a year later, we get a call from his lawyer and he said, you know The guy brought $10 million building platinum and he left it with the dealer and now he wants to physically hit.

Yeah, he wants it physically. And the dealer’s not giving it to.

Yeah. So we knew the dealer and we, we said, you know, pay us our fee. And we called the dealer and said, you know, he got caught with the money, the metal, and they did five days. Yeah. And it was, as we were times now, what about the $10 million we put into the 10th textile? Oh, it’s worth a million now. Yeah.

So as, okay, so he still had the $200 million, $300 million that he didn’t invest. It’s just sitting there earning interest. He said, yeah, yeah,

Ben: [00:54:11] yeah. That’s diversification. Right. And you, you, you put a small piece into the, some of these higher, higher beta, higher risk speculative plays. And sometimes they go even worse than you know, down 90%.

That’s for sure. I’d be, I we’re jetting up against the time, but I would be curious. I mean, we talked quite a bit about having a better understanding of financial markets, bubbles, gold banking. I’d be curious if you have any books or articles that you could point my readers to, to, to have a better understanding.

And I know those are kind of pieced all over,  I’ll give you those categories. And if you have anyone that, that sticks out, please let us know.

Jeff: [00:54:54] I don’t know anything off the top of that, obviously for precious metals, CPN grids, gold year over year, but planning, those are the best introductory books on it.

I wrote a book called commodities rising in 2005 that it’s dated, but it’s basically a primmer on commodities investing. And in terms of money and banking, and I don’t know of anything off the top of my head just looking at my bookshelf because there are some books that exorbitant privilege, which was a book written on currency markets.

Maybe a decade ago. That’s a really good book on the history of Goldman because yeah, you talk about beliefs and stuff. People talking about the good old days and they don’t realize that 1950s, 1960s up until 1971, there was one currency crisis after another. And we got off of the Bretton woods, dollar gold standard.

Simply because it was so painful to all these different governments. Yeah. And they think, well, you know, we had a stable economy during the gold standard. No, we didn’t. We had a much more volatile economy during that gold standard day. We had to be constant currency crisis. And the currency didn’t float every day, they were fixed until such point as they would be break bankrupting the government.

And then there’d be this abrupt sort, so exorbitant privilege. But yeah, I would say part of the problem in America and the world today is people read for confirmation and they they’ve got to get away from that. And, you know, buying basic textbooks yeah. Going to the community college and taking money and banking model looking for unbiased sources of basic information.

Yeah, I talk about the forced things of ignorance, just not knowing. So I guess stupidity, the ability to think critically. Yeah. To say that doesn’t make sense. And then delusion being diluted by others and itself delusion you know there’s a thing called the Ignation Ignation presumption Saint Ignatius who created the Jesuits came up and he said, if you wanted to debate something with somebody who doesn’t believe what you believe, you have to understand presuppose that they have a legitimate, honest, good reason for believing what they believe and get to know what drives their beliefs with them and their thinking.

And then you can have a conversation. And you might be I think it was Karl popper who took and wrote a critique of Bertrand Russell’s philosophy. And when he wrote it, like the first third of it was, this is what Bertrand Russell’s philosophy is, and this is why he’s wrong. Yeah. And it was a fabulous paper and Durden Russell’s reaction was I want to get the right to reproduce the first third, because he was much more succinct and to the point than I’ve ever been in explaining my beliefs.

So, you know, I think you got to move away from reading for confirmation and you have to start reading for comprehension and you have to stop saying, Oh, well, I’m going to follow. I’m going to watch the news here because it reaffirms my view. I’m going to read the news here,

Ben: [00:58:24] even though it might be a little uncomfortable and something that conflicts with your beliefs.

Right, right. Awesome. Really, really good advice. I actually liked that in an exorbitant privilege. I ha I haven’t checked that one out, so I’ll definitely link all of those things in the show notes, but Jeff, it’s, it’s been a real pleasure. I really enjoyed this conversation. Many thanks for coming on.

Where do you want to leave my listeners? Where can they find out more about you or CPM group?

Jeff: [00:58:48] Well, they can find out about [email protected]. There’s some free reads and there’s some videos that we’re doing these days and there’s information on some of the books and reports that we do.

They can send me [email protected] and say, this is who we are. And we’d like to talk to CPM about what you do and what you might do for us. And I want to thank you for having me on. It’s been very enjoyable. Yeah. Unfortunately I didn’t get to come to LA and sit with you on the beach with you.

This you know, it’s 35 degrees here in New York. But say lobby.

Ben: [00:59:22] Well, next one we’ll we’ll we’ll do one in person masks, shields, you know, big plexiglass in between. It’s something really comfortable like that. Jeff, it’s been a pleasure. Thank you so much.

Jeff: [00:59:35] You’re welcome.

Ben: [00:59:37] There you have it. Thank you for listening.

I really appreciate your support. Show notes, transcript links, and more can be found on our [email protected]. If you’d be so kind, please share this with anyone you think might be interested or get some value from this conversation. If you have any questions or comments, please reach out.

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Happy investing.

Ben Lakoff is an entrepreneur and finance professional. He has developed strong global finance experience through 10 years of international assignments in the US, Brazil, Afghanistan, Southeast Asia, Czech Republic and through the award of his Chartered Financial Analyst (CFA) certification.