Dollar To Get Whacked, Catalyzing Gold And Silver Price Rally

Mike Gleason: It is my privilege now to welcome in Greg Weldon, CEO and president of Weldon Financial. Greg has over three decades of market research and trading experience, specializing in the metals and commodity markets, and his close connection with the metals led him to author a book back in 2006, titled Gold Trading Boot Camp, where he accurately predicted the implosion of the U.S. credit market and urged people to buy gold when it was only $550 an ounce.

He is a regular presenter at financial conferences throughout the country and is a highly sought-after guest on many popular financial shows, and it's always great to have him on the Money Metals Podcast. Greg, good to talk to you again and welcome back.

Greg Weldon: Thanks, Mike. My pleasure.

Mike Gleason: Well, Greg, let's start by getting your update on what impact trade policy and tariffs may be having on the U.S. economy. We last spoke in July. Tariffs were just beginning to actually take hold. Since then, the President has imposed additional tariffs. Anecdotally, we have seen some effect. We've recently ordered some steel storage lockers for our client storage vaults and the price was increased 10% based on the higher cost of imported steel. There are also wholesale price increases coming on one line of the preparedness products we offer on our SurvivalGoods.com website. We can assume lots of businesses are experiencing the same sort of thing. Do you think tariffs are now having a significant effect? Is any of the recent weakness in the equities markets attributable to trade policy, do you think?

Greg Weldon: Yes, no, and yes. First of all, in the sense of is tariffs having an effect, absolutely. But maybe not in the way you think and not in the way you couched the question. What I find really interesting is the Fed just published a really comprehensive survey last week in which they asked businesses, manufacturing firms, I should quantify, but this is where we're talking about in terms of trade ... Manufacturing firms in terms of the impact of tax cuts versus the impact of tariffs. And the results were fascinating, because the impact of tax cuts was dramatically positive, as you might suspect. But what you might not have suspected was the impact of tariffs, which were there a degree of percentage of firms which had negative impact from tariffs? Yes. I don't remember the exact numbers, but it was somewhere less than 20%.

At the same time, there was roughly something like 13% of firms that said that tariffs actually helped their businesses in terms of generating high revenue and to whatever degree there would be benefits to certain businesses, so offsetting and mitigating the negatives of the 20%, the 13%. So the net-net negative was not as big as you might think and was overwhelmed by the positives still from the tax cuts. We know that to be true as it relates to labor, stock buybacks, and even wages.

I think from the U.S. economic slowdown perspective not a big deal, and that's what Trump's counting on. But the bigger picture, absolutely an impact, because it's affected China so much, and China was already slowing. So the GDP numbers that came out, and you know that we look at most things from a mathematical perspective, and one of the knocks on China is the slowdown in retail sales, the slowdown in money growth, the slowdown in GDP growth, the slowdown in industrial production and FDI.

But the nominal numbers are so high in trillions of renminbi that of course you're going to have a percentage slowdown, because you came from such a low base. So something like retail sales, you've gone from a 15% year-over-year rate to 9, and everyone's up in arms because the consumer in China's slowing. No, it's a record number every month. It's just a lower percentage gain because the nominal numbers are so huge now.

But right here, the third quarter numbers, were different. There was real weakness, and it's kind of even ahead of tariffs, which are going to cause more problems for China. We already see inflation on the rise. We see commodity prices in renminbi breaking out here, big thing that nobody's really talking about too much. And the renminbi's about to take out 7, probably going to 7-1/4. So yes, major impact, but it's on China.

Then you see the flow through to how this affects the U.S. and how this affects other global markets, and this coming at a time when you have a lot of other things going on: The Fed, what's happening with emerging markets, how emerging markets, specifically Turkey, might flow into Spain, and how Europe is vulnerable. So, there's a lot more than just tariffs going on. Yes, there's a major impact, but it's not on the U.S. economy. It's in the market vis-a-vis what's happening in China as a result.

Mike Gleason: That leads me right into my next question. The President has said he would prefer to have trade without tariffs. He is imposing them as a tool to negotiate more advantageous trade deals. What do you think of the strategy here? It looks like obviously the Chinese economy is in trouble and maybe they will be more willing to negotiate, but we aren't sure the U.S. is in nearly as strong a position as the president thinks.

If you look at the balance sheet of trade on goods and services, yeah, it appears they need us more than we need them. But that is ignoring the fact that the United States is the world's largest exporter of debt and inflation. We need trading partners to keep buying Treasuries and keep taking our dollars in exchange for stuff. So, how would you rate the President's chances of winning, given what we have to go on so far?

Greg Weldon: Well, you hit on all the pertinent points there, Mike. We could have a three-hour conversation just on this one topic, this specifically. But I'll give you the short answer, and we said this before potentially on your show, is the strategy here is pretty simple. I mean you have two guys, doused in gasoline, holding matches, lit matches. The U.S. match is longer than the Chinese match, so the dynamics here is do we get to the point where we're self-immolating and you're basically catching on fire here? The strategy in the U.S. is that as the match in China gets shorter they're going to blink. The numbers support that thought process certainly from the trade perspective. There's no doubt. The numbers are overwhelming, frankly.

But you then, of course, lead to the next phase. And it's very much like the Cold War with Russia in the '50s and '60s, into the '70s and into Star Wars. It's the same thing. It's called MAD – Mutually Assured Destruction – but that's what you have. China relies still, even though they've grown their own domestic wealth, they've grown their own domestic income, they've done all these things, it's such a wide gap still, it's a race against time where time is quite much infinity to some degree. So that still leaves China somewhat dependent on the U.S. consumer, frankly. But at the same time as the net debtor nation and China holding a ton of U.S. Treasuries, therein lies the potential for Armageddon, so-to-speak, where China starts dumping. Already they're not buying, so now the next move would be they sell.

But that means everyone blows up and everyone catches on fire. So how this pays out, I don't know. One of the things to me, Mike, is actually you know how Trump is, and sometimes he's his own worst enemy. Does he have a valid stance? Absolutely, against Canada, against Mexico, against Europe, against China. Yes, should be no tariffs. Free trade is free trade, and we're really the only free free trader. So it is unfair and China's taking advantage, so something had to be done. Is this too dramatic a step? Well, we're going to find out, and we're kind of starting to find out, because China's kind of melting down and that's having a bigger impact on global markets. But if the end game is China's upset because they were called a currency manipulator a year ago at a time when renminbi was one of the strongest currencies in the world.

Trump, I think really, from what I understand (from) back-channels, this is still kind of a little bit adolescent at some level, because kind of Trump feeds into that and he brings that on himself by acting that way sometimes, by acting out instead of being more presidential. To some degree it works, but to the degree where China's kind of pissed off, and China's kind of like, "You know what? You insulted us. We don't really care. We're willing to go down to whatever degree."

And you say China's hurting and people look at it China is slowing. China is not slowing. The growth is slowing. So guess what? 6% on a level of GDP that's now significant isn't chump change. The U.S. would kill to have those numbers. So, yes, it's Mutually Assured Destruction and you have to think that China will ultimately come to the table. They're traders. This goes all the way back ... You can bring up Marco Polo, for crying out loud. So they're very astute. They are very smart. I mean, I've dealt with them for 30 years. They know what's going on. So I think at some point they come to the table. That's the hoped for. The question is, how much damage is done by the time that happens?

Mike Gleason: What is your take on the current volatility in stocks? October certainly has not been kind to equities. Metals investors are certainly watching the action closely. Unfortunately, with metals trading inversely correlated with equities for the time being, the road to higher gold and silver prices is likely through lower prices on the Dow. The total absence of safe-haven buying has hurt metals, at least as far as we see it. Do you think we have much further to go in this correction in stocks?

Greg Weldon: Yeah. I think it's only begun. And I thought yesterday was a very dangerous day, yesterday being Tuesday, the 23rd I think it was. Because you have the setup for kind of like a crack, a big crack. It was almost, and I've been talking about this since the beginning of the year, there are correlations to 2007 and '08, and that's more macro in setup, but when you look at the market structure and some of the more overlaid type of correlations, there's a lot of 1987 here.

We talked about this in the beginning of the year, where the bond market would come under pressure, particularly, and if you go all the way back to the piece I did in September over a year ago and called it Shrinkage, after Janet Yellen came out, dropped the word, "We're going to normalize policy," which I hated, because what does that mean? It means nothing, versus we're going to go to a “neutral” policy.

That change was huge, because what it did was it exposed the two-year note for being way out of position, because it was way too low relative to where neutral would be a level that correlates to inflation. So immediately the two-year note was going to be the target, and it was, and you had a huge move. We actually said it was going to 265 when it was 140.

It got to 265. It was almost exactly the move. Why? It wasn't rocket science. It was because the inflation rate was somewhere between 220 and 250 if you look at CPI, and that's what I'm going to use. The Fed can use PCE. I'm still going to use PCI relative to the markets, because that's what the markets still are going to look at frankly.

So, that move was easy, but then the thought process was even last September coming into now that if the Fed said they're going to go further, which they did, Jackson Hole and then the September meeting, that would be a problem, because then you bring the bond market into play. Because you can push the two-year notes only so close to the bond markets, the yield curve is not going to invert here and that's going to push the bond yield up, which it did. It broke 3-1/4 at the same time Turkey was melting down for a second time, when inflation jumped to the level of interest rates they just jacked 600 basis points to get to, that single day kind of precipitated all of this.

But if you look back, this has been a bond market buildup much like '87, where in that case the bond market was under a lot of pressure, it was the long end then. It’s the short end now. Leading into August, when you kind of had some kind of denouement in the bond market, and then all of a sudden stocks started to feel it, emerging markets started to feel it. You saw emerging markets' currencies crack in August. Same kind of setup, different era.

To me, this volatility was expected. We said at the end of August if the Fed moves in September you'd see a selloff in October. That's exactly what's happened, and I think it's just beginning. I think you have much more volatility. This is nothing. The on-balance volume indicators, everything. You haven't had any liquidation and that's a dangerous accident waiting to happen, when if you go to sell somebody's high priced stocks that have huge ownership and a diminished turnover in shares because the price is so high, you have a potential vacuum of buyers under this market. So I don't think you've seen the worst of it by any stretch of imagination.

Mike Gleason: Just over the last week or two, we've heard a couple of former Fed chairs, Alan Greenspan and Paul Volcker, both coming out and talking about what a bad spot we're in economically and that the chickens will be coming home to roost here before long. Talk more about this tough spot that the Fed is in, because it seems to us that they're really stuck between a rock and a hard place here with rates. They want to keep inflation from getting out of control, but they also probably don't want to kill the economy. And we both know how important, say, the housing and auto sales sectors are in the economy, for instance; And sales of those two big ticket items are very heavily linked to interest rates, and we can see that they've been starting to show signs of cracking here of late. How do you see the rising interest rates impacting the consumer drag, and what might that mean for the economy moving forward?

Greg Weldon: Well, I think that's what the market is exactly telling us, because, again, in August we said if the Fed moves in September, you’re going to have a catalyst here. Because you want to chase inflation, but how far do you chase inflation when you put the consumer at risk? And the consumer is at risk; the consumer's already stressed. You can talk about (how the) Target CEO says the consumer's the strongest he's seen in 30 years. The Fed even mentions, "guess what, consumer balance sheets are pretty "'healthy'". There's nothing healthy about the consumer. This is a steroid-addled consumer that has lived for years on monetary steroids.

The correlations are precise in terms of balance sheet expansion, increases in retail sales. It went from QE1 to QE2 to QE3 to fiscal QE because you were flatlined in 2015 into the middle of '16 until Donald Trump won the election. And then it was fiscal QE. You've run that out now, and everyone owns these shares. To the degree that the Fed keeps pushing here, it puts the consumer at risk because the consumer has borrowed against the stock market unrealized paper profits in a paper asset that they believe cannot go down in price. Doesn't that sound familiar, 2007, 2008, housing, mortgage equity withdrawal, and huge consumer debt? They went upside down.

You have the same setup here. Different dynamics, but the same exact setup: over-leveraged consumer relative to the stock market. If the stock market gets hit, the consumer will go down. I think we've talked about some of these stats before. Before the September rate hike, the monthly payments on interest cost, in other words, paying the interest to carry the credit card debt, not paying down the debt., $325 billion per month it's gotten up to. A record high, number one, and number two, 60% of total retail sales on a monthly basis, which is $510 billion a month. That's number one.

Number two. Consumer credit card debt now accounts for 78% of all new consumer debt over the last 12 months. Further, that growth in that debt at $72 billion nominally over 12 months exceeds the growth in retail sales at $31 billion by more than two to one. Now, some of that is using credit cards for more things. But if you look at the Fed's New York household survey, you see people under the median income of $58,000 a year are using credit cards and borrowing money to pay their bills. They don't own stocks; the tax cuts are not huge enough with them. It's more corporate.

This is why they're talking of middle income tax cuts now, because they've kind of left behind that lower level. It's half the economy. So, wow, to think that this is kind of the situation where you put the Fed behind the 8 ball. Do they keep chasing inflation higher at the risk of deflating the consumer and causing a collapse? That's the big question. I don't know how it plays out, but I think the Fed is very close to taking their foot off the break. And that's why we think there's a new trade coming at some point in here, where it’s dollar down and gold rallies.

Mike Gleason: Before we get a little bit more into gold and silver, Greg, I know you keep close tabs on many different commodities and all the precious metals so I wanted to get your update on what we're seeing in the PGMs, the platinum group metals, because I've really been fascinating by this widening gap between platinum and palladium because, my goodness, we've got about a $300 palladium premium versus platinum right now as we're talking on Wednesday afternoon. What's going on there, Greg, and should we expect palladium to reach parity with gold here soon?

Greg Weldon: You know what, honestly, it's really hard to handicap what's going on here, Mike. For the life of me it's kind of in its own universe. Palladium has been. This has been going on really for the better part of a year and a half, two years, where palladium got up and then exceeded $1,000 and really came off hard. We actually got short, and we had some nice profits over a two-day period which then evaporated over the next two weeks. We didn't catch this move because, frankly, I didn't think this was going to be a situation where palladium was going to go off on its own like it has.

You can look at some of the mining situations. There are some reasons you can use, but they're more excuses. Why this market is doing what it's doing is not empirically evident to me, so I don't know. I honestly don't know. How far can it go? I don't know. I mean, you know how these things are. You've been around long enough to know that you can never count on any kind of situation, any kind of parity, anything going to levels that you never thought possible before. You can't think that way.

So, could platinum get to parity with gold? It's pretty dang close already, so yeah. Sure, it could. Could it exceed gold? I mean, frankly, if you want to take it to its base level and strip away all the monetary, all the psychological, all the historic, all the emotional attachments to gold and, even to a lesser degree, silver, if you go to the heart of the matter, which is the supernova, which is where these elements are created. It's why they're the most rare elements in the universe, not just in the world, in the universe, because they are created at those last moments when a star collapses into itself. So palladium, from that perspective, is a more rare metal than gold. So maybe it should be priced higher.

Mike Gleason: Yeah, good point. It'll be very interesting to see that play out. Well, as we begin to wrap up here, Greg, I'd like to have you share your thoughts with us, where do you think you think we go from here. Also give us any other insights on what you're going to be watching here in the weeks ahead as we approach the all-important November elections and then the last couple of months of the year.

Greg Weldon: Yeah, the elections are kind of a wild card. It's funny, you could actually say that having kind of a gridlock is actually when you get your best performance in stock market. So, I don't give that a huge, high risk factor. If there were to be a surprise, it's a risk, no doubt. But I don't think that that's the way that this next phase is going to play out. I don't see that as the catalyst, per se. Not the highest odds, for sure.

I'm really watching Europe, Michael. I mean, I think that what's going on with the banks in Europe, what's going on with Italy and Spain, let's not forget Spain. There's a lot of focus on Italy, and we know... the Northern League and the Five Star Movement, they don't want the euro. And they picked a guy that would appease the president to be their economics minister when it was almost potentially going to go back to another election when they could've actually lost their coalition. So they brought the guy in. It's going to be, "Rah, rah, the euro." They're not, "Rah, rah, the euro." We know they're not.

And we watch the yield spreads in Spain and Italy relative to Germany, because they’ve widened. This is a risk yield spread. It gives you a sense for the risk. These are countries. I mean, we don't have to talk about the debt, but we should because no one talks about it. It's massive. It's still huge. I mean, Spain, not in quite the situation as Italy but they're above 90% of GDP. It's still a crisis-like setup. So, that's another huge risk factor, and if I'm watching anything right now that's kind of what I'm watching.

And then the other thing, of course, is the high-flying tech shares in the U.S. because that could be an accident waiting to happen. That's when you start creating real doomsday scenarios that are not macroeconomic and probably not long-lasting, but would have a major impact. If you have some of these stocks where there's no buyers under them and people go to liquidate and it starts out innocently enough, let's take profits, take some money off the table, I'm in Palm Beach County. You know where I live.

I've been approached more in the last month, and I'm not talking just last week or so. I'm talking back into September by some of my wealthy friends that are not in the business. I mean, this is one of the richest counties in the country and I'm at the low end of the scale over here compared to some of these people that I know, right? But they're asking me, "I feel like I should take some caution here." Yeah, returns are diminished. You've gotten all the good news from Trump priced in. You've had the big rally, and now people are a little nervous they're going to let it slip away. That's a dangerous situation. When these kind of people start asking me, I take notice because that is an accident waiting to happen. So the risk points are kind of like the U.S. high-flying tech shares, and then what's going on in Europe to me is really where the manifestation of all this takes place.

Mike Gleason: Then, lastly, metals moving forward. What are your thoughts there?

Greg Weldon: Well, the release valve always has been and will be again the dollar. So when the Fed finally wakes up and realizes, "Hey, maybe we've pushed the consumer a little too far here and we're at risk now of not meeting our GDP growth goals, which are 4 to 5% normally”; are you kidding me? For next year? You think that's going to happen?" Let alone the fact that the Fed's Dot Plot gives you 3-1/4 to 375 next year, the futures market is actually priced to imply some belief in the market that the Fed won't even get to 3% with Fed funds.

And the market has been right throughout this entire time since 2014 versus the Dot Plot. They have under plotted the Dot Plot, and that has been the right move. If that plays out, and I think it will, it means that the Fed may be closer to taking their foot off the break than they're going to keep moving for the next 18 months. I don't see that. And when that slip takes place, the dollar is very vulnerable to me, technically speaking, because it's a long-term pattern that goes all the way back to the '70s and you're in the zone here where the timing is perfect, the technicals are perfect, the Fed kind of eases off, the dollar gets whacked, and that's going to be the catalyst for the next move in gold and silver. And we like gold and silver right here.

The risk is not insignificant because if the Fed goes too far and the Fed goes further, frankly, that runs the risk of bringing deflation. You see, some of the commodities are wobbling here. We're bearish on crude oil, but that's it's own universe as a bonus for your listeners. But we like gold and silver; we just think dollar's the release valve, it always has been, it will be again. And when that time comes, and we think it's sooner rather than later, it may not imminent but it's laying in wait, but when it happens you're going to want to belong to metals.

Mike Gleason: Well, great stuff. Once again, Greg, we love having you on and appreciate your insights as always. Now, before we let you go, please fill people in on Weldon Financial, how they can find you, and any other information they should know about you and your firm.

Greg Weldon: Sure, yeah, I've been in the industry 35 years. Started in Florida Comex, worked at Moore Capital, one of the biggest hedge funds in the world in New York, and started my own gig 20 years ago. I've been doing this for 20 years. We provide Trade LAB as part of the WeldonLive service. It's all-in service, one price. You come to the website, sign up, you can get a free trial. We have specific trades in every area: stock indexes, ETFs, bond futures, the currencies, the metals, the energies, the agriculture commodities. We really cover it all.

I'm a trader by trade, and the research is from that perspective, to help you navigate these markets and maybe even some money at the same time. We call it the research that pays for itself, and actually, right now we're heading into the new year, we're going to be raising prices, so we're kind of running a special. This year's price is still available, so anyone can take advantage of that by visiting the website. It's WeldonOnline, or you can email me at any time, [email protected].

Mike Gleason: Well, excellent. Thanks again for your time, and have a great weekend, Greg. I look forward to our next conversation. Take care.

Greg Weldon: Yep, you too Mike. You do a great job. Keep it up.

Mike Gleason: Well, that will do it for this week. Thanks again to Greg Weldon of Weldon Financial and WeldonLive. For more information, simply go to WeldonOnline.com where you can sign up for a free trial. Again, all of that information at WeldonOnline.com. Be sure to check that out.