 This is Mises Weekends with your host, Jeff Deist. Hey ladies and gentlemen, welcome back once again to Mises Weekends. Very pleased to be joined by an old friend of ours, Ronnie Stoverly, who lives in Vienna, runs a firm called Incrementum in Liechtenstein. He's also the author of this tremendous book called Austrian School for Investors. I should say one of four authors, which is a really interesting book that you need to read if you haven't, and you're interested in your own investment portfolio because it really gives you some insights into what Austrian economics might mean for you as an investor, but it's also just an unbelievably great little compact explication of business cycle theory and some other Austrian precepts. So I really recommend it. All that said, Ronnie, good afternoon. How are you? Hi, Jeff. It's great being here again. All good, enjoying the summer and of course the World Cup. The World Cup, yes. Well, here's the interesting thing is this weekend I wanna talk about an old subject and that is gold. I wanna provide a full-throated defense of it. Even in libertarian circles, gold is often sort of dismissed as a relic and cryptocurrencies are the new thing and a gold standard is a cranky idea that could never work today. But Ronnie, let's start with this. Ron Paul wrote a lengthy talk, a speech recently about the dollar dilemma and one thing he points out in this is no matter what happens over all these years, over hundreds and hundreds of years, no matter what central banks do, no matter what governments do, they've never been able to make gold, not money. They can't suppress it somehow. They can't and I think central banks, they have a kind of a paradoxical task because they have to explain their people that their currency, be it the dollar, be it the euro, the yen, whatever is great, but still they're holding quite a lot of gold. I mean, for industrialized countries, they're holding roughly 20% of their total reserves in gold. So if it's useless, as most central bankers would say, why don't they still hold it? And I think that Ron Paul has regularly really put his fingers in the wound at various hearings of folk, Greensman, Bernanke. And I think it's really very, very valuable to get a feeling of how they really stand. And I think there's some central bankers, of course, Ellen Greenspan, who wrote Golden Economic Freedom, one of the most brilliant essays about gold ever written, but also Paul Volcker and some other who do understand gold, but then there's many, many others who don't get it. Well, you mentioned central banks holding gold. They hold it as reserve asset, but really that in a de facto sense, that means monetary gold. And they'll openly tell you that they hold it for diversification and risk management. So isn't a reserve asset on a central bank balance sheet basically, isn't that a form of money in this sense? Of course, of course. And if it wouldn't be money, why does the US have 8,100 tons? Why does the IMF have 3,000 tons? Why does the euro system hold more than 10,000 tons of gold? Why has Russia tripled its gold reserves in the last 10 years? Why is China buying every piece of gold that's not nailed down at the largest mining production in the world? And they don't export any gold at all. So I think, as I've said, it's kind of paradoxical. Central banks do not really enjoy talking about gold and its monetary aspect, because of course they have to defend their feared currencies. But still, I think since basically the year 2000, industrialized nations, they basically stopped selling gold, while on the other hand, emerging markets countries, those countries where there's real prosperity, real growth happening, where the capital structure is improved, where businesses are built. Those countries are heavily importing gold, but it's not only the local central banks that are buying gold. It's also private people that are buying gold. In those countries like Russia, China, of course in Turkey, Kazakhstan, et cetera. Ronnie, what's interesting is there seems to be almost a cultural component to this. People in Russia, people in India, people in China, people in the East view gold differently than people in the West. And also certainly in terms of the Chinese, they have a much greater propensity to save money, even though their per capita income is far lower than people in the West. So they view gold differently in the East than we do in the West. And it's also interesting that gold seems to be flowing, physical gold seems to be flowing from West to East. Well, I think it's mostly economic dynamics that are just much better in those emerging market countries. I just returned from a conference in Kazakhstan, and Kazakhstan is one of the largest exporters of oil, gas, rare earth, uranium, of course, many base metals and so on. And there were roughly 3,000 delegates. And most of the delegates, they were Chinese, there were Asian, lots of delegates from Eurasian countries. There were hardly any Americans. And I think what is currently happening, we describe that with this term of de-dollarization, which is going on, which is a long process, of course. And I think when it comes to gold, gold plays a major role in that process. But we should not forget that in those countries that you mentioned, India, Turkey, but also China, gold plays a very, very important role. Those are countries with a highly inflationary history and probably future, where gold just helps people with securing purchasing power. And I think it's, you can also kind of make this so-called case for the love trade. Often people say, okay, if you like gold, that's because you're expecting everything going to hell, hyperinflation, monetary reform, et cetera. But I think you can also make the positive case because in those countries, where there's real growth happening at the moment, they've got a very, very high affinity for gold. If you have a look at a Bollywood movie, which is for me quite, quite hard to watch, but the weddings in India, there's gold plays a major role. For them, gold, it's obviously money. And therefore, I think it's no coincidence that gold on every continent, in every culture, in every religion plays a very, very important role. And I think the market throughout history, throughout centuries has decided that gold is something special. I want to get back to your point about central banks holding gold. Obviously, the United States central bank is the biggest in the world. Apparently Germany is number two, but interestingly, the IMF is apparently the third largest central bank holder of gold in the world. So what does this tell us about what the IMF really thinks as opposed to what they say publicly about special drawing rights becoming the next world's reserve currency and tying all this to a basket of underlying currencies, but they still, at least in practice, see a role for gold? Well, I think, as I've said before this, it is interesting that all the major players, they still hold enormous amounts of gold or even buying more gold. When it comes to the IMF, I would say, if you read the reports that the IMF is giving out, if you listen to Mrs. Lagarde, which is pretty hard because there's quite a lot of rubbish that she's actually saying, but I think that they really want to establish the special drawing rights as a world's reserve currency. So I think the fact that the Chinese Yuan was included into the basket of reserve currencies into the SDR last year, that was no coincidence. I think if you have a look at the practical value of SDRs at the moment, for example, for international trade, but also for flight tickets, there the accounting happens in SDR terms. So from my point of view, of course, the SDRs would kind of be feared currency squared. It is probably quite the opposite of what an Austria would really enjoy having as a sound currency. One of my friends once said, money used to be IOU gold, then it became IOU nothing and the SDRs are who owes you nothing because it is for people, it is very, very hard to grasp what an SDR actually is. Who's responsible for the SDR? Who's really behind? What is the IMF for normal working class people? That's just basically impossible to understand, but I think it is very, very important to say that gold and to a lesser extent silver has always played a decisive role when the change over from one global currency to another took place. So it is most of the times a revaluation of real assets like gold against financial assets like currencies bond and so on during those changeovers. So if the SDR should become the new world reserve currency, I think gold will play an important role in that transformation phase because just an example over here in the eurozone when they introduced the euro in the whole campaign of explaining the euro and the concept of the euro, they really often told people that the euro system holds more than 10,000 ounces of gold to create trust in the new currency. So we know from crisis to crisis, it's getting bigger and that the solutions, quote unquote, they're kind of getting more extreme. So I think the next big crisis that will happen sooner or later, of course, might really be not a cyclical crisis, not a financial crisis, but a currency crisis. I want to bring up the crash of 2008, 2009. What's interesting about that period is we saw that diversification, especially for the average Joe, doesn't always work. In other words, all asset classes can go down in a crash at the same time. But gold performed pretty well during that period. And as you mentioned, it's one of the best performing asset classes since about 2000 on an annual basis. What do you think gold will do or react or how will gold react in the next crash? Well, the thing is, and that's kind of something that I'm mentioning quite often at the moment. I think at the moment on surface, everything looks fine. We've got equity markets doing extremely well. We've got bond markets doing okay, real estate all over the globe is booming. We've got trust in the financial system, in banks and even in politicians is coming back. We're seeing that inflation, like price inflation, not monetary inflation, of course, is not a big issue yet. It's kind of this Goldilocks scenario. So at the moment, one would say, okay, we don't need any gold, but those headwinds that gold is facing, they will become tailwinds when recession fears come up, when the market realizes that the emperor has no clothes. Because let's face it, the superficial stability of financial markets only depends on the faith of market participants in central banks, in their whole monetary philosophy, in their power to manage the market. And I'm pretty certain that if the Fed fails with its normalization efforts and the US falls into recession, which is our expected scenario, then there will be a severe loss of confidence in central bank administered monetary policy. So the thing is now everybody thinks, okay, we've got rising rates, we've got quantitative tightening, which is a huge factor from my point of view. People vastly underestimated the consequences of quantitative easing and they're making the mistake to vastly underestimate the negative consequences of quantitative tightening. So if the crisis happens sooner or later, market participants will realize that actually the toolbox of central bankers is pretty empty. I mean, in the US, the Federal Reserve can lower rates in the euro zone with having even worse problems because we're still at the zero bound and we're still doing quantitative easing. But normally in the course of a recession, central banks lower interest rates by 500 basis points. So we would be deeply in negative territory. And of course there will be another round of quantitative easing, but we're seeing declining marginal utility. So the next round of QE will probably not be only 85 billion per month. It will have to be significantly higher. So this is probably the perfect storm for gold. If this tide of the turn is happening, it is not happening yet, but it will happen. And I think we crunched the numbers on that. There's only very, very few asset classes that do well in the course of a recession. And gold on average rises by 20% within recessions because gold discounts that central bankers will insert monetary stimulus that politicians will insert fiscal stimulus. And this is definitely positive for gold. But I think it is important as being a professional in the investment market, the amount of your gold holdings really totally depends on your time preference, on your risk aversion and so on. But we have shown in our last gold report and we're writing that for 12 years now that at least some gold really makes sense for everybody because it is a great portfolio diversifier. And we started that last year. It is actually something that Nassim Taleb would call antifragile. So I think you at least want to hold some gold even if you're not in the Austrian camp, it just makes sense to have some sort of golden portfolio insurance. Yeah, it's interesting though, it's not particularly sexy or renumerative for fund managers to suggest gold to their clients as part of the portfolio of the fund, right? Because they don't really get a commission for adding gold to it and the investors don't really get a return, a dividend or don't see a lot of price appreciation like they might see with Amazon or a typical equity. Yeah, well, but I think then we're coming back to time preference again. I think if you as a private banker, as a portfolio manager did a good job in 2008 if you kind of didn't have a significant drawdown and if you preserved purchasing power during that phase, I think you will have the most loyal and the happiest clients. So I think getting your clients through the next crisis, whatever that crisis will be is really important. It's not easy these days because markets are so heavily influenced by interventions but I think it is possible. And I think if you're a prudent portfolio manager, you have also to accept that this such a kind of an Austria portfolio approach is not for everybody and the market is a maximizer of pain. And at the moment we're seeing that many, many market participants are throwing in the towel because they say, okay, gold is kind of dead. Apple is roaring Netflix, Tesla, whatever are doing so great. I'm just going into the stock market again. Ronnie, talk about the relationship between gold and interest rates. As the Fed tells us they're going to raise the Fed funds rate at some point, the European Central Bank is going to have to get back into positive interest rate territory. What will rising interest rates mean for gold and the price of gold? Well, we have shown that actually end of 2015 when interest rates were raised the first time. This was the moment when gold made its button. This was the moment when everybody said gold is dead. It will drop below $1,000, but it didn't. And I think much more important than nominal interest rates are real rates. And actually it's the direction of real rates that is most important for gold. And just to give you a view on inflation, headline PPI just came out yesterday and it was 3.4%. It was the highest since November 2011 in the US. Now we can of course discuss those baskets and CPI, PCE at length, but it is obvious that there is some inflationary trend going on. And I've studied this 28 page list of China imports and products that the US is putting tariffs on. And it is quite a gripping reading I would say. And this has to be, and this has to has an inflationary effect. And I think this has always been our roadmap. I think Rothbard once described that when he said first there's monetary inflation. Okay, check that, we already had that big time. Then there is asset price inflation. We are having it. We are in the biggest bubble probably of all times. This everything bubble where we're not seeing extremely high valuations in one sector or in one country, but on a globalized basis. And normally the third stage is price inflation. And this is actually what central bankers and politicians always wanted to achieve. So I was just sitting on a panel with somebody from the ECB and she said, unfortunately there is no inflation. And I said, pardon me, but we're seeing massive inflation. Just try buying a house or a flat somewhere. Just have a look at the equity markets. Just have a look at the balance sheet of the European central bank. There is massive inflation and there will also probably be much more consumer price inflation. In your report you talk about the Dow gold ratio. Why should we particularly care about the ratio between the price of gold and equity markets or equity indices? What does that mean to us as average people? Well, I think it kind of shows the trust in the system. I think the Dow gold ratio is for a long-term perspective quite important. Because many people say that there is this natural bottom at one where one has to switch from gold into equities. I'm not so sure about that, but what we are doing much more than our competitors, we're following relative prices much more than absolute prices because absolute prices are so heavily distorted by central bank interventions and the interest rate level. So on a relative basis, you just can see that gold is extremely cheap versus equities. But you can also see that commodities in general are extremely cheap compared to the stock market. You can also see that the monetary price of gold is basically at the same level like in 1971 or in the year 2000. So if you say that the gold backing of the US monetary base due to all the printing, actually gold got significantly cheaper throughout the last couple of years. It's pretty interesting, we just ran the numbers and actually Russia has got the highest backing of its M-zero monetary aggregate. So they're on kind of a gold standard, 54% of their M-zero is backed by gold. And I think having a look at the overall, at the big picture, it is so fascinating that what is going on at the moment, not only from a political point of view with all the somewhat erratic actions by Donald Trump and Donald Trump has got some very, very interesting commands about interest rates, but also about gold. But also with the whole crypto revolution that is going on. I think that there at the moment, there is something big change happening. But of course, this is a longer process, but this de-dolarization that we're seeing now because it's no coincidence that Russia just dumped 50% of its US Treasury holdings. And in the same month, they bought I think 700,000 ounces of gold. And this is just one example. And there's so much more happening on a daily basis. And I think that's also the beauty of the Austrian School of Economics. If you really want to avoid only analyzing the symptoms and make a very, the analysis on a surface, you often come to the conclusion that the root cause of all the problems that we're having in our society regarding finances, regarding the economy, whatever, the root cause is most of the times in our monetary system. You bring up crypto. Of course, the crypto community and the precious metals communities both want to take the provision of money away from governments and central banks. Talk about how those two communities perhaps ought to come together rather than viewing each other as competitors in the sense that they have the same goal. Well, first of all, I have to say, Jeff, that I think the whole development that we're seeing at the moment, it is fantastic that there is young people coming more from the tech space that they're discussing money again. What is money? Is Bitcoin money? Is it better money than the Euro, than the US dollar? What functions does money have to have? And then they often arrive at the Austrian School of Economics. If you read the white paper by Satoshi Nakamoto, I think he has read his Mises. He really understood the stock-to-flow ratio. He understood gold. And I think there's many, many aspects of Bitcoin that kind of make it digital gold. It's no coincidence that the symbol of Bitcoin is a gold coin, that you are mining Bitcoin. So I truly welcome this development. As you know, Demel Sir Hayes, who's also at the Mises Institute and who's doing a wonderful job at the University in Liechtenstein. She's writing the Crypto Research Report on our side. And it's really fantastic that the whole sector is really like a magnet, not only for financial capital, but also for human capital, that there are so many smart, ambitious, revolutionary ideas happening at the moment. And if we come to the cryptos, of course we have to talk about the denationalization of money. Hayek always said that monopolies are detrimental to economies, that the monopoly on money is an extremely powerful tool at the state's disposal. And it's a monopoly that has been abused for about as long as it is existing. And therefore, we have in our Lasting Gold Retrust Report kind of summed up the denationalization of money. And also what Hayek would say about cryptocurrencies. And of course he would welcome this development. He would welcome competition in the currency space. And of course, last year, we have seen a big move in the crypto space, but we should not forget at the moment, I think the total market cap of cryptos is $240 billion. 43% of that is Bitcoin. I just had a look at the market cap of Apple. It's 933 billion. So of course, there's plenty of room to move forward. And I think there's plenty of ICOs and cryptocurrencies and products that are rubbish that won't be around in the next two or three years. But I also think that there's a few ideas, a few projects that will completely revolutionize our living. So I'm definitely positive on that. And in the gold space, we can see that gold as some sort of the oldest monetary technology is being combined with blockchain technology. And there is, for example, the Perth Mint, the UK Mint that's just teamed up with FinTech companies, with technology providers to make gold more approachable for millennials. Of course, millennials, they don't care about banks anymore. They've got a completely different lifestyle, much more digital lifestyle. And for them, I think you can make gold, physical gold, definitely more attractive. So I think the combination of the two, if you will, technologies is extremely powerful. And therefore, I just really enjoy this competition that is coming up. Well, it's interesting, Dr. Paul makes the point in his talk that people are reluctant to accept Bitcoin as payment or to use Bitcoin as money because they don't understand it. They think it's technologically murky or beyond them. And that he suggests that if you back cryptos with gold or connect or tie them to gold, people will recognize that and understand it and it'll actually make cryptos more palatable to the general public and hence accelerate the ability of cryptos to be widely accepted as money. I wanna wrap up by talking about this conundrum. We know that central banks around the world hold lots and lots of US dollars. And individuals and business enterprises around the world hold lots and lots of US dollars because it's the world's reserve currency. So in that sense, it's not in their short-term interest to have the dollar crash. However, it's very much in their long-term interest to have the US dollar replaced as the world's reserve currency, whether that's with what we would like, which would be gold or cryptos to replace the dollar or what the IMF would like, which would be for SDRs to become the new reserve currency. But the fact remains that it's in the rest of the world's interest to knock the dollar off its pedestal, but yet they've got a bunch of them and they don't want them to lose money in the short-term. So this is a conundrum. It is, yeah, it is. And I think it's really important to understand this core periphery disease that every time when the dollar gets stronger or too strong, you are seeing massive problems in the periphery of our financial system. Like at the moment, emerging market countries like Turkey but also Argentina, countries that have massive, not only government debt, but also on a corporate level and also on a private level that are massively indebted in US dollar terms, they are becoming big problems because if you have a look at the Turkish lira, it is collapsing. So of course, then it's also no coincidence that private people, but also the Turkish central banks are massively buying gold. But I think when it comes to the US dollar, I think having a look at the dollar since Donald Trump is in power, he actually absolutely, the dollar did what Trump always kind of said. And last year we wrote perhaps Donald Trump is kind of a gold buck. But for his America first rhetoric, he needs a weak dollar and he quite often said that the dollar is overvalued. He said that the dollar is too strong. Our companies can't compete with them now because our currency is too strong and it's killing us. He said, this is the United States government. First of all, you never have to default because you print the money. And he also said, which is really interesting, he said bringing back the gold standard would be very hard to do. But boy, would it be wonderful. We'd have a standard on which to base our money. So I don't want to say that Donald Trump is really wants to reintroduce the gold standard. But it's also, it's not only Trump who made some interesting comments about gold. Also vice president, Mike Pence, he said that actually the times of a gold standard of the classical gold standard were extremely prosperous. So he said, I think the time has come to have a debate over gold and its proper role. It should play in our nation's monetary affairs. A pro-growth agenda begins with sound monetary policy. So I think that those are really, really interesting comments from Donald Trump, but also from Mike Pence, perhaps they understand gold. But of course, they do not want a strong dollar and we have seen quite often. We have seen Mr... It's hard for me to say Niu Xin, Steve Niu Xin. And he said in Davos that he wants a weak dollar but we have also seen quite recently and that was really, really a big thing from my point of view that Larry Kudlow was kind of pressuring the Federal Reserve and he said, okay, perhaps they should pause with their rate hikes. And I think those are things suggesting that actually if Donald Trump wants to succeed with his reindustrialization, he wants and he needs a weak US dollar and actually the whole world kind of wants a weak dollar but they want to kind of manage it and not have a collapsing dollar. So I mean, last year, gold was up in dollar terms, it was up 14%. That's quite a big devaluation from my point of view. But I think that the most interesting fact having a look at the dollar from a financial market perspective is that in January, beginning of February this year, we have seen some sort of a mini crash, really some volatility in financial markets again and normally in such a crash environment, the natural reaction by market participants is, okay, let's go into the US dollar and US treasuries but we have not seen this this year. So actually the US dollar was weaker and US treasuries were sold off and I think this is perhaps one of those kind of signs of this paradigm change that we have been discussing now. Well, ladies and gentlemen, we are out of time. Again, Ronnie Stofferly, he is one of the managing directors of Incrementum, an investment firm in Liechtenstein. He is also one of four authors of this great book, Austrian School for Investors. If you want to find out more about him or his fund or his book, check him out on Twitter. He's Ronnie Stofferly. His Twitter is at RonRON. Stofferly, S-T-O-E-F-E-R-L-E. And with that said, Ronnie, thank you so much for joining us and ladies and gentlemen, have a great weekend. Subscribe to Mises Weekends via iTunes U, Stitcher and SoundCloud or listen on Mises.org and YouTube.