Gold To $6,000 As The West Faces Economic 'Shutdown' | Steve Hanke

A professor of applied economics discusses the current global economic landscape, focusing on gold's trajectory and the concept of market bubbles. He predicts gold will reach $6,000 an ounce, a calculation based on historical secular bull market peaks relative to disposable personal income per capita, rather than geopolitical events or monetary policy. The current frenzy around gold is attributed to widespread uncertainty not fully priced into equity markets, with gold acting as a hedge against "tail risk."

The discussion delves into the economic challenges facing Europe, particularly Germany's increased energy costs due to reliance on more expensive liquefied natural gas after reducing Russian gas supply. This situation is seen as potentially leading to de-industrialization. The US equity market is described as a bubble, overvalued and ignoring significant global uncertainties. The professor introduces his "bubble detector," a metric derived from a Nobel laureate, which relates asset values to income and the time it takes to acquire yield, indicating an imbalance between stock and bond markets.

Further topics include the impact of tariffs, with the assertion that Americans, not foreigners, ultimately pay tariffs. There's a critique of interventionist economic policies, including price controls and government meddling, drawing parallels to socialism and describing the current US approach as "interventionism on steroids." The conversation also touches on the perceived economic strengths of China, particularly in areas like mining and material science, contrasted with the regulatory environment in the US dominated by lawyers. Finally, signs of distress in the US regional banking sector are noted, linked to rising loan delinquencies, though the professor emphasizes that such issues have been building for some time.

• Gold is projected to reach $6,000 an ounce, a forecast based on historical market behavior relative to disposable personal income per capita.
• The US equity market is described as being in a bubble, overvalued and ignoring global uncertainties.
• Europe, particularly Germany, faces significant economic challenges due to increased energy costs from a shift away from Russian gas.
• Tariffs imposed on imports are paid by Americans, not foreigners, acting as a sales tax.
• Government intervention in the economy, including price controls and "industrial policy," is criticized as a form of socialism or interventionism that mirrors aspects of China's economic model.

Gold's Projected Peak and Market Uncertainty [00:00]

• Gold is predicted to reach $6,000 an ounce as a secular bull market peak.
• This prediction is based on a calculation where gold peaks at approximately 10% of disposable personal income per capita in the United States.
• The rapid increase in gold prices since September 21st from $3,600 to $4,300 is noted.
• The calculation for the $6,000 forecast is independent of foreign wars, monetary policy, or the dollar's value.
• Previous market analysis by Goldman Sachs, which assumed various global crises, projected gold to $5,000, but this prediction differs by focusing solely on historical market behavior relative to income.
• A World Gold Council article suggests that the current rally, despite its speed, is only 735 days in, shorter than the average of 1,062 days for previous major rallies.
• The current market frenzy for gold is attributed to a "tremendous amount of uncertainty" not being priced into equity or other markets.
• Gold is described as a hedge against "tail risk" and an "uncertainty bet."

Correlation does not imply causation, but the minute after your podcast went up, the thing took off like a rocket.

European Economic Challenges and Leadership [06:53]

• Foreign wars and weak leadership in Europe are identified as sources of uncertainty.
• Specific European leaders are mentioned in a critical context.
• France has experienced government turnover and faces significant fiscal problems.
• Germany is facing numerous problems, including cutting off Russian gas supply and the subsequent reliance on more expensive liquefied natural gas (LNG) from the United States, approximately three times the cost of Russian gas.
• The Nord Stream 2 pipeline incident is suggested to have possibly been intentional, expanding the market for US LNG.
• German contracts for Russian gas are "take or pay," meaning they must pay for gas they don't receive.
• These high energy prices are forcing Germany towards de-industrialization, which is contrasted with the post-WWII US goal of an agrarian Germany that did not materialize due to the Marshall Plan.
• Germany's manufacturing sector, at about 23% of GDP, is twice the size of many other European countries (e.g., France at 12-13%).
• The IMF's World Economic Outlook forecasts no growth in Europe, with Germany at -0.3%, France at 0.7%, and the UK below 1%.
• The situation in Europe is seen as fitting into the broader picture for gold.

What what is substituting for that gas? The Russian gas is liquefied natural gas mainly from the United States, but the cost is about three times higher than the than the Russian gas. So they're paying an arm and a leg for this substitute LNG.

US Equity Market Bubble and Valuation Metrics [13:05]

• The US equity market is described as being in a bubble, characterized by being overhyped, overpriced, and overvalued.
• This bubble is attributed to market participants ignoring uncertainty and potential problems.
• The adjustment of this bubble could happen either through a rapid "pop" or a slow deflation.
• A "bubble detector" metric, originated by a Nobel laureate in economics, is presented as an indicator of market bubbles.
• This metric relates the value of assets to income, specifically how long it takes to buy an asset or its yield.
• An imbalance exists in the market, where it takes significantly longer to acquire yield in the stock market compared to the bond market.
• Excessively long times to acquire yield indicate a market bubble.

It it's easy to calculate. So let's say let's say you know I gave him this example. Let's say a a stock a company is making $10 a year but its enterprise value is at a million dollars. Well we could safely assume that it's in a bubble. That doesn't make any sense.

Silver's Performance and Portfolio Rebalancing [18:45]

• Silver has breached $50 per ounce and is now trading at $54, reaching new historical highs.
• This level of $54 is comparable to the 1980 surge led by the Hunt Brothers.
• A friend who holds a significant amount of silver bullion is contemplating selling.
• The conversation touches on portfolio rebalancing, suggesting that as an asset like silver balloons in value, funds may rotate out.
• For individual investors, the decision to sell is more complex than for a fund with a mandate.
• The idea of rebalancing a portfolio, such as a traditional 60/40 stock-bond mix, is discussed.
• If a portfolio has become overweighted in stocks (e.g., 85/15), rebalancing back to a more balanced ratio (e.g., 60/40 or 70/30) is considered prudent.
• For portfolios including stocks, bonds, and gold, the adjustment would depend on the specific mix.

Well he was he he was scratching his head because he said under the presidency he his he prefaced the you know the whole thing with the following. He said well un under the economic policies of of Joe Biden he thought silver would take off and it never really did much of anything. and he says now it's taken off you think I should sell.

US-China Trade Relations and Tariffs [24:24]

• A 100% tariff on China was announced, with a potential effective date of November 1st.
• The announcement was followed by communication indicating potential discussions between leaders.
• China has stated it will not back down from the new tariff.
• The US trade representative noted that much depends on China's actions.
• The narrative that China started the trade war is criticized as "ridiculous"; China is seen as counterattacking with restrictions on critical materials and rare earths.
• China controls these critical materials and the technology to process them.
• A warning is issued that China could shut down the Western world in six to nine months by cutting off these materials.
• The current US Secretary of the Treasury is attempting to counter China's control over critical materials.
• There is skepticism about the claim that the entire world will decouple from China.
• The press and Western media are accused of spinning narratives that are factually incorrect.
• The US is described as copying China's economic model, rather than the other way around.

When you are facing a non-market economy like China, then you have to exercise industrial policy. He's not calling this socialism or interventionism. He's calling it industrial policy.

Interventionism and Economic Policy [28:37]

• Setting price floors is described as a disaster and a form of price controls or interventionism.
• This approach is seen as copying China's economic model, labeled as interventionism or "socialism."
• The US has seen a lot of this, but it is now amplified under current policies.
• Politicians are seen as having excessive control over the economy, dictating fiscal and monetary policy, and even influencing business decisions like hiring and firing.
• The term "socialism" has morphed into "interventionism," which is also described as "politicizing all aspects of life."
• Businesses must constantly worry about government actions.
• The argument that industrial policy is necessary when facing a non-market economy like China is countered by the idea that this forces the US to become a non-market economy itself.
• The US is accused of copying China's economic model, not the other way around.
• Setting price floors is likened to a bailout, essentially giving money to industries.
• Developing resources like mines is a lengthy process involving thousands of permits and regulations in the US, contrasted with China.
• In China, lower-level politicians are perceived as corrupt, while the top hierarchy is composed of highly trained engineers.
• In the US, the top leadership in Washington D.C. consists of lawyers, contributing to extensive regulations and red tape.
• China is seen as advancing rapidly in areas like AI, mining, metals, energy, and material science, far ahead of the US, due to an emphasis on merit.

This this is unbelievable that what's going on. I I I think the term socialism has morphed into interventionism.

Inflation and Money Supply [34:53]

• The impact of a 100% tariff on China on inflation is questioned.
• The Consumer Price Index (CPI) rose to 2.9% in August from 2.3% earlier in the year.
• Inflation is characterized as always and everywhere a monetary phenomenon, with aggregate price indices moving with a lag after changes in the money supply.
• A "significant inflation" is defined as 4% lasting two years or more.
• Significant inflation has historically been preceded by a significant increase in the money supply.
• Since April 2022, the US money supply has been contracting, bottoming out in the summer and showing a slight increase, but the stock of money is not much higher than in early 2022.
• The "golden growth rate" for money supply (M2) consistent with a 2% inflation target is about 6%, and current growth is slightly below this.
• Tariffs impose a sales tax on Americans for imported goods, increasing their prices.
• The perception of inflation is influenced by the rising prices of imported goods, which make up a significant portion of daily consumption.
• While imported goods prices are rising (around 4% annually), other goods and services are increasing at a slower rate (around 2%).

Inflation is always and everywhere a monetary phenomenon.

Federal Reserve Policy and Regional Banking [41:16]

• The market is pricing in interest rate cuts, with expectations for a cut in late October and another in December.
• Rising import prices could lead the Fed to reconsider its policy.
• The Chicago Mercantile Exchange's data on federal funds futures is presented as an objective measure of market expectations for Fed policy.
• Market prices are considered objective indicators, reflecting the collective opinion of market participants with "skin in the game."
• Regional banks are showing signs of stress, with significant drops in share prices for some institutions.
• This distress is linked to loan delinquencies and loose lending practices, particularly in sectors like the auto industry.
• Rising delinquencies on mortgages and loans have been occurring for some time, becoming more accentuated as specific banks report financial results.
• While overall delinquencies may still be below historical averages, specific cases are drawing attention.
• The write-offs by banks directly impact their balance sheets and can lead to valuation adjustments.

The only objective measure we have for what the Fed's going to do with federal funds is to go to the Chicago Mercantile Exchange and look at those charts that you just put up there.