Market Opportunity: Why Gold’s Long-Term Case Endures

MIKE BARNES 0:10

Welcome to America’s Gold Authority Podcast. My name is Mike Barnes. Gold has been the charging bull the last couple of years, but now it’s kind of entered bear territory. Why is this happening and what do we need to do? Let’s be joined by a couple of experts. Philip Diehl and Brad Chastain join me now. And Philip, let’s start with you. As the 35th Director of the United States meant, president of U.S. Money Reserve, you’ve seen bear markets in the past. Why is this happening now?

PHILIP N. DIEHL 0:36

Well, I think it’s very clear just by the record and by the dynamics, that what is happening is that beginning in June, early June, we had the Federal Reserve begin to take a look at raising rates. And the first thing that happened that was important was a jobs, a strong jobs report that came in early June that uh really indicated that we uh because we had such a strong job market, uh, it was unlikely that uh an increase in the Federal Reserve federal funds rate would uh slow down an economy that was already weakening. So that was the first signal. Then in the middle of the month, we had um we had the federal first Federal Reserve meeting, which uh Kevin Walsh was chairman, and that uh that meeting really gave a strong support to the inflation hawks, the people who want to really fight inflation. And as a result of that, the expectations in the marketplace were uh rising for uh higher interest rates. And then early this week we had a couple banks, among them uh Bank of America, who came out and were forecasting two to three uh interest rate hikes, a total of uh a half to uh three quarters of a point. And that was really a surprise to the market. I think the general consensus before that was that we were looking at a quarter of a point before the end of the year, probably in October, and Bank of America set the expectations for a quarter point in September, and then two more in October and December. And so that sort of built a fire under um under expectations, and we’ve seen 10-year treasury rates rise since then, uh, and they’ve uh risen abruptly, and we’ve seen markets, including equity markets and gold, react to uh to all this money that is beginning to flow out of these other investments into uh into bonds, uh, looking for safety as interest rates are expected to rise.

MIKE BARNES 2:57

So many things happening. And Brad Chastain reminds me of about a year ago when we were talking about the perfect storm with gold going up and up and up, and now things are seemingly going the the other way with the interest rates, with the inflation, with the dollar, all these things are kind of compounding to make gold go down.

BRAD CHASTAIN 3:14

Yeah, there’s been just a number of sort of temporary headwinds in this. I mean, the the long-term bull trend is very much intact. That has has not broken. I mean, gold is still up 20% since June of last year. Um, I mean, it was just nine months ago in September where Goldman Sachs estimated it rising from at that time about 3,500 to 3,700, had a year-end price target for gold to get up to $3,700 by the end of last year in 2025. So um if you think about this in long-term investors, it it’s it’s not a big deal. I mean, if you if we had seen gold go from you know where it was in June of last year, and you told somebody, hey, gold’s gonna be 20% higher today, a year later, um, they would be typically be thrilled. It’s just psychologically that you see prices at a higher price, even if they’re not immediately rational in the short term, that we set it, kind of set this psychological high water mark. And if it’s fallen at all, then there’s this major pullback. But um realistically, I mean, what we see is that most of that is, you know, speculators, it’s ETFs, it’s hedge funds piling into the that that trade. And it’s the what we’ve talked about many times, the paper market driving the day-to-day price. Long-term holders that are buying physical are not selling physical. In fact, there’s been record outflows of both gold and silver from the commodities exchanges, which didn’t used to be the norm. It used to be, you know, on the COMEX, people just traded paper futures and they would pretty much never take delivery of the metals out of the vaults. And we’ve seen record outflows of actual physical metals from the vaults over the last couple months, even in this decline, as long-term holders are really, you know, continuing to accumulate. Uh, we’ve even seen central banks uh do a little bit of selling lately as well, because gold is, again, that safe haven asset that you need when times go bad. And with the war and the disruption that’s going on, um, both in Ukraine and the Middle East, we’ve seen disruption take place where Turkey has been selling some gold. We’ve seen Russia been selling gold, and it’s there for when they need it. When they didn’t have access to other things and they needed to be able to protect themselves, they’re using it. But those that have uh are in a little bit better situation to be accumulating have still been accumulating. China has been a big buyer, they’ve still been buying gold every single month, adding to their reserves as well. So you see these sort of push-pull dynamics right down but now, but the the long-term trend is has not changed at all, and we’re still very much on that, even though it got uh quite a bit overheated uh more recently. This sort of reversion is long-term healthy.

PHILIP N. DIEHL 5:56

Yeah, that you know, I think that’s a really important point that Brad is making, that the people and the institutions that have incentives around gold that are like the incentives of our customers and our potential clients uh are really aligned, and that is that they are buying gold uh for the long term. And they see these opportunities, and you’re seeing this in China in particular and other central banks around the world, they’re jumping on gold as these prices decline. And one thing to really bear in mind, and I think gold is near its bottom, uh, it may have a little bit further to go, but uh, one thing we’ve learned across all markets is that timing a purchase of an investment is really a losing game. Nobody knows when a market is going to turn around. So the best practice is average the price of your purchases so that if prices are falling and continue to fall, then if you bought before that, then you average the prices as they go down and then you ride them up when they recover. And that’s really a good strategy right now because I think we’re gonna get a big solid bounce out of gold. One of the reasons is I think the expectations that have driven gold down here in the last three weeks have been overblown. I don’t think the Fed is actually gonna be as aggressive as the market has reacted. One thing that Kevin Walsh told us is as part of his so-called regime change and how he’s going to change the operation of the Federal Reserve, one of the things he talked about is changing how the Federal Reserve communicates. And really that the communication, there’ll be a lot less of it, number one. And most of it is going to come from the chairman and not from other members. That was one way that he really criticized the Fed, is that uh it was sending mixed signals. And so I think we’re seeing the beginning of this right now. I suspect what happened, and this is all, you know, my reading of the of the behavior of the Fed, is that there was probably a link from a leak from the Federal Reserve to some of the banks that uh there was gonna going to be uh likely to be uh an aggressive move on uh interest rates. And really what’s what that’s called is jaw boning. Uh it’s a way of getting the market to react without actually uh changing the rates. And so by jaw boning, we’ve seen uh the Federal Reserve successfully raise interest rates and have the effect of doing so without having raised the federal funds rate. So I think that’s one thing that’s going on. I think that uh we’re likely to see a slowing of the economy, oil prices and gasoline prices, diesel fuel prices are gonna be crucial in how that plays out. And the Fed the Fed is gonna face a dilemma. Either oil prices are gonna come down and we’ll uh get a lessening of the impact of oil on inflation, a little less pressure upward, or what we’re gonna see is gasoline prices stay elevated, and the Federal Reserve really facing a dilemma about whether it raises interest rates to fight that and take the risk of creating a credit crunch. Um the increased prices for for uh oil are straining the market, uh the credit markets. Uh certainly uh AI and the demand for for AI funding uh is doing so. And I think if the Federal Reserve aggressively increases interest rates or or implements QT like uh the chairman said he intended to do, then I think we may be looking at a credit crunch. And that is uh it’s bad for the economy, but it is good for gold. Uh, because gold, of course, has a very strong track record of outperforming its stocks and going up when uh stocks go down. So I’m I remain very bullish, like all the uh independent uh analysts uh remain, and uh I’m still looking at increases to seven to ten thousand dollars an ounce by 2030.

MIKE BARNES 10:52

I love what you said about job owning. Learning something new today. That’s that’s fun to learn, but it’s nothing new to have a bear market for gold. Because Brad Chastain, we’ve seen that quite a bit over the last 50 years.

BRAD CHASTAIN 11:05

Yeah, there’s been a number of times where gold has gotten overheated, and it’s it’s a it’s a financial asset, it’s a monetary asset, it’s an industrial asset, it has lots of different uses. Supply and demand uh plays a role just like in literally anything else. So a lot of times you will see um, you know, one area get overheated and then our correction, but what we really look at is the long term, not the day-to-day, the month to month, or even the year-to-year for that matter. I mean, I wouldn’t pretend to try to tell you where gold is going to be in in three months, but I I feel pretty confident about it over a five, 10-year time frame given the overall structure of we’ve we’ve talked extensively about the sort of this reorganization of the way that the world ultimately operates as we go um through these changes and what that really means for the overall monetary system. And um the the long-term track record is very much intact. The if you draw a trend line across gold over the last few years, I mean you’ll see we’re still right, it got way ahead of the trend line, but it’s still right there on the trend line. Um it’s it’s it hasn’t changed those long-term fundamentals at all. So when you think about um where you want to be in five, ten, twenty years setting family and generations up for success, um, gold very much plays a role in that.

MIKE BARNES 12:28

Well, history has definitely shown us that. And Philip, I want to look at a graph that you’ve put together showing how gold has performed versus the stock market since the year 2000.

PHILIP N. DIEHL 12:38

Yeah, I think this is a really important uh graph to emphasize Brad’s point. Since 2000, and I went back to 2000 because this uh allows us to compare how gold is performed in good times and bad times. And it emphasizes one of the points I I make over and over again that yes, gold is a strong performer in hard times. We can look at uh the immediate impact after after the dot-com crash. Uh, this chart really doesn’t allow that to show because we’re looking over a longer period of time, but uh gold way outperformed stocks during that period of time. And then we look through the the period of the whole 2000s, which was sort of the lost decade for stock prices, and we see gold take off during those uh during those good economic years, uh, but where the stocks, where the stock market really laid flat. And then we see this remarkable departure uh around the financial crisis where gold responded to protect assets, to protect portfolios. And then we see a drop off. Um this really gets to Brad’s point that gold sometimes gets overheated, and it did in the early uh 2010s. Uh, we saw it drop off, and then we’ve seen an increase really take off since about 2020 and 2022. And despite the fact, and really at this end of this chart, we see how gold has really performed extraordinarily well, has been setting record after record as the stock market has set record after record. So this chart shows that if you had invested $100,000 uh in both stocks and in gold in 2000, January 1, 2000, how much more you’d have if uh today if you had held on to both. And one of the things that people typically ask about a graph like this is yes, but stocks return dividends. A lot of stocks return dividends, and you have to include that in the calculation of how stocks go against gold because gold doesn’t return dividends. And this chart includes dividends for stocks. So even doing so, gold uh has far outperformed stocks over those uh 26 years.

MIKE BARNES 15:22

Brad, what really amazes me looking at that graph is the fact that there were three bear markets for gold during that time in 2008, around 2011, and as recently as 2022.

BRAD CHASTAIN 15:34

Yeah, there has. And and what this is why it’s also important not to ever look at just one individual asset class in your portfolio as a as a singular point, right? You want to look at your overall portfolio that’s designed to help you reach your goals and objectives and how the different components behave relative to one another is is really, really important. So um that’s where gold doesn’t have the correlation to stocks that um that other assets do. Um even bonds many times do become correlated to stocks. Gold tends to maintain that uncorrelation to both stocks and bonds, and that’s why we see adding it to it strengthens your entire portfolio. That um going back to that you know 2000 time frame, if you look at it, there’s there’s a financial metric called a sharp ratio, but that is commonly used, but it measures the risk versus reward. How much reward return is something provided, and how much risk is taken to get that re return. And what we see, and we’ve done this if if um you have our one of our literatures that we’ve been mailing for years at this point in time, we show those portfolios over time with dividends reinvested, like like Philip said, How has one performed with just that stock-to-bond mixture? Um, and we’ve included how it changes over time as people get closer to retirement, they get more conservative typically. So it’s really designed to mimic how people actually invest, but then adding gold in there. And what you see is that the the returns have actually been slightly enhanced by having gold, uh, because to Philip’s point, it’s actually outperformed stocks over the timeframe. But most importantly, even if the return was a little bit less over that time frame, if it drastically reduces the risk, then you have a better risk-to-reward relationship. And it has also drastically reduced the risk. The risk has gone down because, again, gold tends to offset stocks when it goes down. If gold happens to have a bear market, most of the time stocks are doing. So your overall portfolio evens out those ups and downs when you have that diversification there. And looking back at 2008, for example, having gold in a portfolio, the overall portfolio declined during those years, but not as much as just stocks. And it recovered significantly, years faster than just the stock bond portfolio. So that’s why it’s always important if we talk about diversification a lot, um, to zoom out and look at the big picture and how these assets work together. And it’s why we believe everybody should have an allocation to gold within that overall portfolio.

PHILIP N. DIEHL 18:03

Mike, I’d like to emphasize a point here. And that is there’s growing recognition that over the last 10, 20 years, these portfolios that are balanced, more balanced with gold, that incorporate gold, outperform the old traditional 60-40 stock-bond uh ratios. There’s growing recognition of that, and that’s really important. For example, the CIO of Morgan Stanley, but other major advisors as well have backed off uh the old traditional 60-40 recommendation and are now recommending something along the lines of 60-20-20, 60% stocks, 20% bonds, and 20% gold. That has huge implications. The movement of investors into gold at this level uh creates a virtuous virtuous circle uh for gold prices. Um right now the average portfolio of retail investors in the U.S. is uh has about 2.8 percent gold. I mean, it’s very small. So a small increase toward 20 percent, even another just another 2.8 percent, that increase is likely to have an enormous impact as funds roll out of bonds and into gold. One of the reasons we’re we’re gonna see this, and this is an important point, because when you look at past periods of time that we’ve been talking about in which gold has fallen off, and then for example, in the eight uh in the 1980s and 1990s, gold stayed flat for almost 20 years. Well, why is that not gonna happen today? There’s multiple reasons, but one of the big ones is that today our deficit is at $40 trillion. It was way below that at that time. So you didn’t have that pressure. Also, the central banks all across the world were selling gold. They were net sellers of gold. We now have an environment where for over 15 years they’ve been net buyers and the buying has accelerated. So there’s these structural forces that are underlying gold prices and the industry today and uh are going to reassert themselves as interest rates peak and then uh begin to come down.

MIKE BARNES 20:51

Well, Philip, that 60-2020 allocation is maybe even more important as we look at the next graph for the future. Just looking to 2030, which is only four years away, experts say it’s really going to go up.

PHILIP N. DIEHL 21:04

Yeah, that’s right. And uh basically what the experts are saying is that the strong market performance we’ve seen of the last uh 15, 16 years is not going to be repeated in the long run. And I think there’s a broad consensus around this. In the short term, there may be strong performance driven by AI, but that is a very narrow basis for the stock market to continue, and we’re seeing increasing signs of risk in AI. But over the next four years, there’s a broad expectation that both stocks and bonds are not going to perform that well. And gold does have these fundamental supports behind it. So, what that graph is showing is that the institutional investors, these are not the gold. Sellers, these are the institutional independent institutional uh uh analysts. They are forecasting uh a conservative estimate of prices through 2030 and then a bull case uh for both stocks and bonds. And I have compared both of these scenarios through 2030, and this graph shows the gold under the conservative scenario, gold far outperforms stocks, and then under the bull case scenario in which both stocks and gold double or greater than uh under that scenario, then gold outperforms as well. So what we’re talking about is, and I think this is very realistic, we are looking at gold prices of $7,000 to $10,000 an ounce by 2030, by the end of 2030. And uh again, this is these are estimates and targets not set by people in the gold industry. They may be much more aggressive than that. I don’t know. I really don’t uh look at their estimates. I try to keep my eye on what the independent advisors have to say and why they have to say it.

MIKE BARNES 23:20

Well, history shows that it could happen because, Brad, some experts say that the current bear market is comparable to 1974, 75, 76 when gold took a little bit of a dip. And after that, it went up by about 400 percent. So anything can happen with a future bull market.

BRAD CHASTAIN 23:37

Yeah, you’re you’re exactly right. You that’s why I never try to predict exactly what’s gonna happen over when. I look at a long-term trend, and um this uh it’s shaping up where you know gold’s long-term return is looking more and more attractive at these current levels, certainly than it was, you know, a number of months ago, in fact. So um technically I embrace a further pullback. I don’t know if we’re gonna get it, but I would embrace that as an even stronger buying opportunity. I’ve already been well overweight in gold just because of the run that it has had over the last couple of years, and I have not rebalanced in any way. I’ve just let it um become overweight. But uh so my long-term allocation is set, but I would definitely start looking even more at a short-term, which I don’t typically do, uh, opportunity if it if it pulled back further.

PHILIP N. DIEHL 24:27

Is it realistic to see $10,000 an ounce in um basically three and a half years? Is that possible? Well, all we have to do is go back two and a half years, and gold has gone up by two and a half, by 2.5x. So is it possible that gold will do that again after a bear market that we’re in right now uh in three and a half years? Absolutely, it’s possible. It’s very realistic.

MIKE BARNES 25:00

The future is definitely bright. Brad Chastain and Philip Diehl, thanks so much for joining me today.

PHILIP N. DIEHL 25:05

Thank you, Mike. Thanks, Mike.

MIKE BARNES 25:07

The bear market for gold is not uncommon. As we’ve said, it happened in the 70s, the 80s, even as recently as 2022. But gold always bounces back. Many experts say gold will outperform stocks through the year 2030. They see the bull will return. That’s all the time we have for today’s episode. On behalf of all of us here in the U.S. Money Reserve Studios, thank you so much for tuning in. If you have any questions or you want to learn more about today’s episode, you can call the number in our episode description and speak with one of our friendly account executives. They’re going to be more than happy to answer any questions you may have about precious metals and the strategic role they can play in achieving a secure and comfortable financial future. I’m Mike Barnes. We will see you next time on America’s Gold Authority Podcasts.