Edmond Bugos, gold analyst at the Dollar Vigilante, was kind enough to answer our questions. Thank you to Ed for his insightful, Austrian-minded look at current events and the gold market. Bugos talks geopolitical tensions in the Middle East, and how those might play out, as well as the implications there for gold. He also discusses how Bitcoin has been a boon for the precious metals market.
With the drone attack and news of Iran general Qasem Soleimani’s death, what could a destabilizing Middle East region mean for gold prices and why? What is unique today in 2020 about the relationship between gold and Middle East stability?
The destabilization seems to have one obvious result, it keeps US troops committed to being there longer. Some analysis has revealed that the US has been targeting that general for some time, and that Trump got suckered into a geopolitical play. Some of the motivations can be part of distracting from various problems at home, including the impeachment proceedings, a wilting boom, Epstein, who knows. The why’s in any situation like this are mind boggling, which is why Jefferson and Washington and others warned about entanglements with foreign governments.
The gold price has been strong all year on account of what has been happening in the economy, and how the Fed has dealt with it. Investors largely see through the artificial illusion driven by the piling on of debt. So gold is no longer cheap, not as cheap as silver. The Iranaian affair has hastened some of my upside targets. When these kinds of things occur you usually get a spike in risk premiums, gold drives higher, and then it fades away if the affair does, a peace dividend drives it back to where it was.
So it’s often good to short these moves. But something about the situation is troubling. The two sides have been simmering for some time. And both of the States are failing. Both of them need to point to some exterior demon to save face for what’s going on at home. So the potential for escalation at some point is likely to underpin gold prices for now.
There has been a lot of attention on Bitcoin over the past decade. Do you think this has taken attention away from gold and silver? How has the Bitcoin market affected gold and silver’s place in the world?
Not at all. Bitcoin is a gift to the gold story. It widens the audience for it. It’s the same story. They have the same enemies and the same friends. It’s just a shame you have some of the hard core gold bugs that refuse to attribute value to anything that is not tangible, as though the internet itself never produced an intangible asset. But humans are humans. On the crypto side you have the maximalists who believe crypto will destroy everything traditional. They remind me of the internet maximalists back in the nineties who thought of mining as part of an old economy that need not exist now that we had the internet. So they put off a lot of gold bugs because they are not that smart to begin with. A lot of them are hung up on the idea that bitcoin is not tangible, or that anyone can create a cryptocurrency since it’s just code (so they even call it ‘fiat’), or that it doesn’t satisfy Ludwig von Mises’s regression theorem, or that gold is better money, and so on.
All of these are misguided criticisms that puts them at odds with the crypto entrepreneurs, but not all of them are hardcore hard asset types. The Austrians themselves are divided over whether to place relevance on the fact that bitcoin had an original value as a commodity or not, and regardless that Walter Block answered this question by explaining what Mises really meant about the regression theorem. But a lot of gold bugs remember they are not necessarily all in the same political sphere. Some of them are neocons, minarchists, and even communists.
I now see four worthy and sounder opponents for government fiat currencies, including the US dollar: gold, silver, bitcoin and monero. The four amigos, I call them. They move together and they lead the commodity complex because as you know commodity cycles are largely monetary.
You tweeted in November “It is no longer in the interests of the American establishment to promote capitalism at home or abroad, especially abroad.” What do you mean by this?
America used to promote freedom around the world when its rivals ran more totalitarian dictatorships, like the Soviets or the Chinese during the Cold War era. It had the world’s most capital friendly markets. If you were running from another government you could keep your capital in America relatively safe and private. The dollar was a black market currency around the world and thus enabled many humans to survive the atrocities of their governments. So, in effect, by promoting freedom it was undermining foreign regimes. But today, by promoting freedom, it is undermining its own regime, its own empire, its own criminal institutions at home and abroad.
Should anyone actually create a free market system anywhere on this planet of any magnitude it would hasten the dollar’s demise today. It would make for a bad comparison, undoubtedly.
Could you elaborate a bit on the following tweet?
The graphs in that tweet mean to demonstrate the extent to which this boom relies on the brute force creation of money out of thin air compared to previous booms. The manipulation of interest rates through the expansion of money supply is the biggest extra market intervention into the capitalist system. Money is the center of everyone’s life and they steal wealth through the manipulation of its supply directly and indirectly, the latter by its impact on interest rates, asset prices, and the business cycle. It is absurd to me that anyone would debate that any other factor has driven this market higher, but it is also absurd to me that in this mecca of capitalism, the United States, you have a central bank that decrees an interest rate by politburo, as if the interest rate wasn’t one of the most important pricing mechanisms of a free market economy.
Does the situation in Hong Kong have implications for the gold market? Why? Why not?
I’m not sure. But I do think the situation in Hong Kong is a symptom of the failure of “democracy” and of government in many places, not just HK. You see unrest everywhere because of untenable policies causing increasing discontent. In Chile. In Argentina. In Venezuela. In Nicaragua. In Greece. South Africa. Many places in the Middle East. Even in America and the UK. In France. It is everywhere. The reasons may all be specifically different but it is amazing to me that few people are looking for the common thread in all of it. Bad or oppressive policies.
Why do we need regulators to protect us from bitcoin for Pete’s sake? To me that’s just another data point exposing our situation for what it is, we are not free, we have slave masters.
What is meant by this quote of yours? “Investors are playing poker and calling the Fed’s hand.”
By pushing the stock market up before the Fed has decided to cut rates it forces the Fed to give in or face the consequences of a sell off. Sometimes the market plays dead, sometimes it is calling a bluff. In this case, it was calling a bluff. The Fed is out of resolve.
Any other thoughts on the state of gold and silver?
Many. I’m bullish. This next decade should go to precious metals bulls as the excesses and imbalances of the last ten years unwind, and the Fed inflates to try to offset the unwind. The public debt situation is untenable and not conducive to the Fed’s position because an inflation that produces real price rises is going to drive interest rates higher and wreak havoc on the government’s finances, which is likely to incentivize further inflation, and catalyze a vicious circle that can only end in stagflation, if it continues, or a systematic liquidation of public sector assets.
Unfortunately, the low interest rate policy has been around a long time now and has created a situation in debts both private and public that has eroded the central bank’s resolve.
In the late seventies the government debt to GDP ratio was just 10% so they could afford a reset and a spiral in interest rates. Back then, the Fed still had resolve. Today it is much weakened.
The US dollar’s role as a reserve currency has become obsolete and the incentives to keep capital in America are not so great anymore, comparatively speaking. As the speculative bubbles of the last decade unwind you will see a dollar crisis like no other that will drive gold to $5k, or $10k, maybe higher if someone like Sanders ever got in and turned America into Venezuela.
In the short term the gold market has accumulated some risk because of speculation about the Fed and Iran, so some caution is prudent here. But I can’t see anything bearish for gold or silver in the years ahead other than the odd correction after they have run for several months.