Greg Weldon Exclusive: Gold Price Is Rallying In All Other Fiat Currencies

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 have you back on. Happy New Year. Thanks for the time today, and welcome back.

Greg Weldon: It's my pleasure, Mike. Please excuse my voice. I've been a little under the weather this week, so I apologize.

Mike Gleason: We'll make it work. Well, thanks for joining us again. Since it looks to us like what's happening in the equity markets has a strong bearing on what's happening in the metals market, let's start by getting your take on the direction of stocks. Equities had a miserable finish to last year, and conversely metals finished 2018 by moving higher. But since Treasury Secretary Steven Mnuchin put his call out to banks and the plunge protection team, we've seen stocks surging. 2019 is off to one of the best starts for the equity markets ever. Do you think the rally in stocks has legs here, or will we see some selling resume?

Greg Weldon: Well, I think that this is a sell the rally mode here. It will continue to be. To me, it's like well it's all good that the rally is taking place. You basically took out the long -term… I look at the 52-week and the two-year exponential moving averages on the weekly charts as a good gauge for the long-term trends. You have consistently taken out the two-year moving average and closed back above it in the same week. And this goes back over the last 10 years, if you look at this market since the low in 2009.

So it really recovered, but I hardly see this as the beginning of new bull leg to the upside. For one thing, you're barely 50% back to the highs. It's not like you're at a new high here. It's interesting to see on TV everyone talk about how this is the best beginning to a year ever. And it's because you just had the worst fourth quarter in 10 years, so you have to have perspective.

The question for me, where is the growth going to come from? Where is the next trillion dollars of wealth creation? What's going to generate that? Well, is it trade? If we get a trade deal with China, is that going to be the next big thing that's going to drive this market to new highs? Absolutely not. It may drive the market to new highs, but that's not going to be sustainable because at the end of the day, this is not stimulus. We have about a 375 drop ... most recent month to around 350-something. The bottom line is our annual trade deficit with China is less than 2% of GDP. This is not an engine of growth. This is merely a leveling of the playing field to become a more fair and open trade dynamic.

So, I don't see that as stimulus. The fact that the Fed has kind of backed off from their hawkish pursuit of higher rates here also not stimulus. And in fact, I could make a strong case to suggest that the Fed is still tightening without doing anything. Why do I say that? Because inflation has dropped. So, real interest rates have risen.

Since really August, since before the September hike you've gone from a real Fed funds effective rate of minus 100 basis to where it is now more than plus 50. The Fed said they wanted to be neutral. They're past neutral now. I know, it kind of sounds crazy to say a real Fed funds rate of a half of 1% is tight, but it is. When you're draining money from the bond market and when you have this dynamic around inflation and the Fed’s got into a rate that is well above the effective Fed funds rate. If you look at the futures market for the Federal funds rate, for 2010 it's actually pricing in a rate cut now.

And that would be theoretically according to the future strip, the next Fed move. There's a lot of inconsistencies here, but at the end of the day until the Fed actually starts talking about cutting interest rates and being stimulative, they are not. So trade deal not an engine of growth. The Fed not hiking rates more is not stimulus. So, I don't see where the impetus is going to come from to drive this market to a serious new high.

Mike Gleason: In recent months we've been asking you about trade and tariffs so we'll continue there for a moment. The last time we spoke you pointed out that while there are certainly some effects to the U.S. economy the tariffs are helping some firms and hurting others. On net there may not be as large an impact as many people think. It's a different story in China, however. You were seeing signs of inflation and a dramatic slowdown in growth there.

Can you update our listeners as to what's happening on trade more in China and what will that mean for the U.S. if the Chinese economy hits the skids?

Greg Weldon: Well, there's two things to discuss here. First, the whole Trump plan here, their strategy, I've said this before and I think this is the best analogy you could possibly come up with. You're talking about two leaders – Chinese and the U.S. – that are dousing gasoline and standing there with lit matches. Now, the U.S. is in a position of strength given that their match is longer than the Chinese match.

And when you look at the data from China, often misunderstood because nominal numbers are so high now in China in terms of retail sales and GDP growth and so on and so forth. You're not going to have the same percentage gains. It's just not mathematically feasible. Having said that, you've seen a shift in the most recent numbers that is rather dramatic, where domestic final demand, consumer final demand, retail sales, automobile sales have virtually collapsed. This is a real problem. And how are the Chinese going to address this?

Their inflation is dropping like a stone. European inflation is dropping like a stone and we're not talking about Europe yet but that's a big deal for me. But sticking with China, they're in real trouble here economically. What are they going to do? They haven't even cut rates yet. And that to me is almost a symptom of they're afraid that they don't have that many bullets. They have more bullets in a lot of places for sure. But, their real official policy rate is actually quite high now because of the decline in inflation.

So, I would look for China to be the place for stimulus beyond just cutting the reserve requirements four times in the last 14 months. I really thought you might get an official rate cut in this after this most recent round of data. So, why the PBOC (People’s Bank of China) is waiting is kind of beyond me. I don't quite understand it and the longer they wait, the more trouble this is going to be and for sure at some point it'll have a more material impact on the U.S. economy.

Mike Gleason: Greg, I know you're always focused on the consumer, how much debt he has, and you look at it as a good leading indicator for our overall economic health. So, I want to ask you about that and then also get your thoughts on how the government shutdown will be affecting the not inconsequential amount of the American workforce that is going without a paycheck right now due to the shutdown. How do you envision that weighing on the consumer here, Greg?

Greg Weldon: Well, first thing I'll say about that is why are the people in Congress still getting paid when no one else is? That's number one. That's just infuriating as a citizen of the United States. But having said that, the consumer is stretched to the max. And before the December rate hike the amount of money that the U.S. consumer is paying just to float their debt, not to pay it down, just to maintain it, has exploded to a record high which shows you the problem of having such low rates that the second they go up a little bit it has an exponentially greater effect on the consumer.

You are now well above the 2007 highs in terms of the monthly nut that consumers have to pay out just to keep their debt from basically becoming delinquent. You're at about $350 billion a month. That is a huge number when you compare it to retail sales of $510 billion a month. At some point this absolutely crowds out discretionary spending. Not only that, according to the New York Fed's household survey which is a treasure trove information, you are seeing that people that are at the average income level of around $58,000 a year, household/family, they're really struggling. They're relying more on their credit cards to pay their monthly bills.

These things are not sustainable. And the second the stock market wobbles, you start to see the impact on the economy. Why? Because the consumer has done the exact same thing they did when we wrote the book in 2006 into 2007 where they borrowed against unrealized paper profits in an asset that they are convinced cannot go down in value. Back then it was their homes. Now it's their 401(k) and the stock market. And guess what? The stock market can go down and when it does, it is going to leave the consumer in a very, very vulnerable state where you can really see some big pressure on retail sales and particularly in the discretionary area.

The question becomes, when does this start to manifest in the data? It's already started. And how's the Fed going to deal with this is a question they're going to have to. The good thing with the Fed is they were smart enough to ... and they told us this. They've been pretty brilliant actually in what they've done. They've taken it a bridge too far with the December rate hike, in my opinion. But, when you look at ... compare the Fed to the ECB or the Bank of Japan. They have some room to cut rates now. And they told us before they started hiking, "We want to raise rates so when we have another recession we can cut rates and we don't have to change our position on the balance sheet."

And yet what happens? The second the stock market wobbles, everyone starts talking about stopping the shrinkage of the balance sheet. That's insane. It's not going to happen. So, once again, I just don't see how we get from point A to point B without having a real sense of pain in the middle. And that pain comes from the stock market. So, I'm not convinced at all that this rally in the stock market has any serious sustainability to the upside.

Mike Gleason: We've just started a new year so we'd be remiss if we didn't ask you for your outlook on metals. What do you see is the key factors which will be driving gold and silver markets in the months ahead and what are you forecasting for the metals this year?

Greg Weldon: Well, as you know, we're bullish on metals. The dollar has been somewhat problematic in the sense that it's not doing what we thought it would do which is be the relief valve for the Fed since they can't cut rates, they can't stop the shrinkage in their balance sheets. I might anticipate there's some kind of move on the dollar at some point this year. So, they’ve kind of have gold from breaking out through this $1,300 and really the key level in dollar terms of $1,375/$1,377.

Having said that, there has been a big change in the gold market that I haven't heard a hell of a lot of people talking about. That is simply this. Gold is now rallying in virtually every paper currency in the world. And to me, this shows that the world is still understanding that they can't just keep papering over these issues. They're not fixing anything. All they do is throw more paper onto the bonfire. I've used this analogy many times all the way back in the end of 2015, early 2016, we first started getting bullish on gold again (for the first time) dating all the way back to the 2011 high and that is, what you have since 1971 when U.S. went off the gold standard is this gigantic bonfire. And that bonfire is credit. If you want this thing to be sustained, you have to keep throwing more wood or paper or kindling on this fire than you did previously.

If you had to spend three and a half to four trillion dollars when U.S. sovereign debt was nine trillion, think of what you're going to have to do now when U.S. debt is headed towards 23 trillion. Do you think there's the political will let alone the stomach for a, let's say, seven or eight trillion dollar expansion to the Fed balance sheet? I don't think so.

I think you have issues around the math and I think you are headed towards the situation where people are really starting to worry that maybe they can't just keep applying this same remedy. Keep riding the white horse of money printing to the rescue. And if they do, and they will, of course they will, this is very bullish for gold from here because essentially you are now eroding the confidence in all paper currencies because of the huge increases in debt.

Mike Gleason: Yeah, very well stated. It's a big world out there. There's lots of currencies and gold is measured against all of them and that's a very interesting point. It is doing well against virtually every currency. It's a good observation.

Well, Greg, as we begin to wrap up, give us any final thoughts you have here today. What are you going to be watching most closely or maybe what do you think people will be talking about say three to six months from now as we start to see how this new year is going to play out economically and in the markets? Give us your thoughts there as we close.

Greg Weldon: I think three to six months from now we're actually going to be talking about Europe because no one's talking about Europe. It's all trade. It's all U.S. politics. It's all China. In the meantime, Europe is having a real implosion. When you talked about Germany where growth at the beginning of the year was 3% GDP growth was. Real GDP growth was north of 1 1/2%. But the most recent data where GDP is 1.1 despite the fact that inflation has virtually plunged here in Germany, real GDP is now negative. And that's a problem because what is the ECB supposed to do about it?

I just don't see how this reconciles well in Europe at all. So, I think you really have to watch Europe. Interesting to note, by the way too… and I just did a report on this yesterday… if you look at what's happened where you have this absolute plunge in nominal GDP, a deepening negative move in real GDP on the back of a falling inflation, a falling PPI and CPI and every proponent to every single component, this is problematic from the ECB's perspective. What are they going to do? What are they going to do? They're going to buy more bonds? Again, that's the kind of thing where this paper dynamic has become so absurd that people aren't going to buy into it this time.

And when you look at the German bond market, with this recent real erosion in the macro data, the two-year Schatz yield had barely moved and is actually rising. Why? Because it's 25 basis points below the minus 40 basis point official policy rate of the ECB. The laws of physics apply at some point here with negative yields. And I think you've seen that kind of tipping point in Germany.

In the meantime, because the 10-year and more so the 30-year still have some positive nominal yield, they have room to move lower. So, I'm looking at yield curves flattening in Europe much like we saw last year in the U.S. But I am really focused on Europe and then of course, always the U.S. consumer. It is the driving force still of the global economy. Not as much as it used to be, but still is the number one driving force. I think the consumer is close to being tapped out. It's close to being fatigued and saturated with debt. I think these are two major issues and then let alone China. Let alone Japan where the economic numbers are also now coming under pressure.

When you can't increase the rate of a cent in the BOJ's balance sheet by adding more. It's almost already a straight up line. So, I think you have several issues. I would say China obviously kind of number one for right now. But, I think for the next six months Europe is actually a bigger risk point going forward. And what I like about that is just look at gold and the price of euro. The euros gone nowhere. By the way, if you take the dollar index and adjust it by the price of gold, it's actually breaking down. So, that's interesting because the gold market has disconnected from the dollar and you could take a whole number of currencies including the Aussie dollar where gold right now has been or is now at a record high.

Look at the Russian ruble. Look at something as seemingly innocuous and unimportant as the Pakistani rupee which has imploded over the last three months. Nobody's talking about it. Do we think Pakistan is a place of stability where they have those kinds of currency dynamics without some other event starting to take place? It's putting pressure on the Indian rupee which was just recently at a new low.

Gold in both of those currencies at record highs. I can say the same thing about the Iranian currency. When you have the currencies of these types of countries just imploding, let alone the situation of have in Venezuela and Argentina, there is just increasingly more places where you have landmines that you are such at risk of stepping on, to me this is where it really makes the case for gold but what it's always been in terms of the case for gold, which is a store of protective value of your wealth. To me, that's the bottom line and the most bullish scenario that you can create for gold.

Mike Gleason: We'll leave it there. Lots of black swans circling about, it's going to be an interesting year for sure. Well, great stuff as always, Greg. We love getting your thoughts and always appreciate your time and your willingness to come on and speak with us. Now, before we let you go, please tell people about Weldon Financial, how they can find you and any other information that they should know about you and your firm.

Greg Weldon: Sure. If you have not yet had a free trial to our daily research, you're welcome to come to the website, www.WeldonOnline.com and as I think I mentioned once before on your show, we're also about to debut our new boot camp for trading. We've got a new influx of customers that are do-it-yourselfers and a lot of them have real serious and pertinent questions about trading futures market which I think are wildly misunderstood. The risk that is associated with future's markets are real but it can be so easily managed.

And it's a great way even for the retail investor to take advantage of what's coming next by having the flexibility to trade currencies, bonds, stock indexes, all the commodities and more so, to be both long and short these things. So, we're really excited about this boot camp and it's probably still two or three weeks away from being out there. But, any of your listeners that want to get updates on when that comes, feel free to email me directly at [email protected].

Mike Gleason: Well, excellent. Thanks again, Greg. I know you're not feeling your best this week but certainly appreciate you coming on and giving us your thoughts. I hope you have a wonderful and prosperous new year and I look forward to speaking to you again as the year unfolds. Take care and have a great weekend.

Greg Weldon: Always my pleasure, Mike. You do a great job and again I apologize for my horrifyingly cracking voice here.

Mike Gleason: Well, we've made it work and we certainly appreciate it. I was very recently experienced the same thing … hot water with lemon and honey, that’s my advice for what it’s worth.

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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 if you haven’t already taken advantage of that. It’s a great time to get on board with Greg as he just mentioned with that boot camp for trading coming up here very soon. Again, all of that information at WeldonOnline.com. Be sure to check that out.

And check back here next Friday for our next weekly Weekly Market Wrap Podcast. Until then, this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a great weekend everybody.