The Real Reason Gold Dropped: It Is Becoming The World's 'Neutral Asset' – Peter Boockvar
Summary
The S&P 500 just hit all-time highs while inflation runs at 3.8% and real incomes fall for the third consecutive month. At the same …
Transcript
Welcome back. I'm Jeremy Saffron. Oh, gold is trading around4 $4,500 roughly flat. Silver also around $74. Also little change. Platinum, palladium under pressure. But here's the bigger picture here. Earlier this year, gold was trading above $5,000 and now roughly 10 to 12% off of those highs. Now, that move lower happened while inflation surged, while oil spiked roughly 55% in a matter of weeks. And while global bond yields hit multi-deade highs, gold was supposed to perform exactly in that environment. And at the same time, a single semiconductor stock added $200 billion in market cap in one day. The S&P just hit all-time highs and is pushing towards new records again today on reports of a potential Iran ceasefire extension. and also some data. According to the Bureau of Economic Analysis, real incomes have fallen in three months in a row. Now, my guest today has been mapping every piece of this and getting it right. By the way, Peter Bookvar is CIO at 1BFG Wealth Partners, a $16 billion firm. He author uh authors the book report, the daily macro analysis on Substack that everyone feels like, or at least serious investors read before the market opens. He called the bond bare market before Wall Street was ready to hear it and he publicly bet zero Fed rate cuts in 2026 when the consensus was still pricing in several. Uh Peter, welcome back to Kit Kota. Good to see you. >> Good to see you too, Jeremy. Thanks for having me. >> Uh so I mean we can start here. Gold off of its highs, inflation just printed 3.8%. Is the bull case still intact? >> I I believe it is. I I I think what you're seeing in gold uh and also what you're seeing in silver is a digestion and a consolidation of the dramatic rise that we saw last year and the early part of this year. Uh we we know you can't sprint forever. You need to take a breather and I think that's exactly what's happening. Now granted that said we did we have seen a rise in real rates. That's typically a negative for gold within the algorithms. Uh the dollar is still hovering around this 100 level. If you look at the dollar index, that's a drag on gold. So, I think that those are the two main factors. And also more, it's hard to quantify, but I do think gold, as has been US treasuries along with other sovereign bonds, have been a source of funds for those countries that have them and that are having to subsidize their economy and their consumers uh if they are a heavy energy importer. >> Right. Right. So the investment case, you know, didn't break the conditions that triggered for selling did and governments maybe needed some liquidity. Gold was their most accessessible asset. Now, it's different than being wrong on gold. But we're going to get deep into this because what's actually happening goes well beyond most coverage is is telling you. But first, I got to get into this morning's numbers. And audience, stick with me. It's a lot of data, but it does set the context for everything. Now, the BC or the BAE rather this morning reported that PCE inflation up uh about 3.8% 8% year-over-year, highest since 2023. Nearly two full percentage points above the Fed's 2% target. I mean, core PCs stripping out food and energy came in at 3.3 year-over-year. Real disposable income fell for the fir first uh for the third consecutive month. And interesting, I mean, savings rate dropped 2.6%, lowest since 2022. Q1 GDP was revised down to 1.6 from that initial read of two. And and buried in this morning's report according to the BEA is corporate profits. I mean they they rose just.9% in Q1 and that follows a 6% advance in in quarter 4. Peter, uh what type of inflation is this? Because there's the inflation the Fed can fight and then there's inflation it cannot touch. Which is this? >> Well, it's sort of a combination. you know, you you have the conventional textbook inflation is a combination of excessive fiscal spending monetized by their central bank. Uh yeah, that that's partly the case. We have excessive government spending with uh the uh budget deficit relative to GDP still around 6% and obviously debt uh relative to the size of the economy uh in triple digits. Uh now the Fed is not necessarily monetizing it like they were uh during COVID, but they're still buying tea bills. The balance sheet is still very fat. >> But you also have this major supply disruption and you have higher energy prices and other commodity prices that flow through for a lot of different things. And I and I I like to tell economists that give me, you know, the conventional textbook saying, "Well, we're this is not in anymore." more. I might say, well, yeah, kind of it is. But also, the average consumer, the average business doesn't care where the cost of doing business and the cost of living is going up. They just care that it's happening. And whether you want to call it inflation or not, we have an inflation shock. We had it in 2000, 2001, 2000, I'm sorry, 2021 22. Obviously uh that has continued even with this pullback from the highs but now it's obviously reacelerating and there is it's not a coincidence that inflation is the major pain point that has resulted in the consumer confidence index as measured by University of Michigan being at a record low >> right and I mean you know that that headline this morning everyone's talking about that 3.8% at 8% inflation. Yeah, it feels like everyone's talking about it, but the more important line maybe that real DPI down.5% and real spending up only 0.1. So consumers are still spending but their income is shrinking. Is that the definition of of late cycle pressure or is the consumer actually cracking maybe just absorbing another inflation hit? >> So real spending, inflation adjusted spending in the month of April was up just onetenth. >> Yeah. And something really important to understand here too is that when we have you have this energy supply shock, this commodity supply shock, companies don't immediately raise prices. It takes call it two to three months for a rise in their material prices to flow through their cost of goods sold because the average cost customer or say the average company has stuff on the shelves >> that were procured before the war began. As that product runs down, as those shelves get refilled with current higher raw material prices, that's then when they respond either through productivity gains, slower hiring, or higher prices. So, this is something that is going to continue to unfold over the coming months and quarters if you don't see a sharp decline in oil prices and other commodity prices when this straight reopens. Mhm. I mean, you know, GDP too, according to the BA this morning, it was revised lower. You just talked a little bit about real incomes falling for three straight months. Is there a legitimate case the economy is slowing fast enough to, you know, bring inflation down on its own? >> Well, it's a it depends on which part of the economy you're in. Uh certainly with respect to the data center buildout, >> all you're seeing is prices go up. price of construction, the price of steel, the price of aluminum, the price of copper, the price of memory chips, uh the price of everything is going up within that ecosystem. And then other parts of the economy, you know, the cost of building a house, all your raw material prices have just gone up. Cost of labor is still very elevated. Uh obviously the cost to the consumer and everything that they're purchasing uh is going up. Now, will at some point we reach some demand destruction here? Maybe. And we we we're were reminded of that by Walmart last week. >> Mhm. >> Walmart in their conference call said that at $4.50 per gallon of gasoline. Now, they didn't give that price, but that's the average gallon according to AAA. They said for the first time since 2022, the average customer is buying less than 10 gallons of gasoline for their automobile. So, we reached a point at least there that consumers are p pulling back. Now, we need that to sort of arrest the increase in gasoline prices if it's not going to happen via a barrel of oil. Um, but maybe we're beginning to to reach that that that point where uh the demand side starts to falter from here. Now, now again, this is this is a two-speed economy. We all know that it's a two-speed stock market. It's either you're in the AI data center buildout or you're not. And in a way in terms of the aggregate, you know, we talked about GDP, GDP and Q1 was up 1.6%. That was the revision from two 150 basis points was due to data center buildouts. >> So that's the heavy concentration that we're seeing here. We are all in on this for better or for worse in terms of construction and data centers and the equity market performance that's benefiting from all that spend. >> Interesting. I got to talk about the AI trade in a moment. But first, the Fed because this puts Kevin Worsh in a in a, you know, difficult position. He's day six on the job. He got sworn in on May 22nd. President Trump says rates come down very quickly kind of same day within 48 hours. Governor Waller publicly says no rate cuts. Governor Bar said no balance sheet reduction before Worsh, you know, chairs a single meeting. Now, you said that wasn't a coincidence. What was it? >> Well, it was an interesting way for some of Kevin Marsh's new colleagues to sort of plant their flag and and establish their opinion uh because they don't necessarily know what Kevin's going to think. Now, I'm sure behind the scenes there are conversations going on and there will continue to be amongst the group heading into that June 16th and 17th meeting. But I do think that each of these central banks are not going to sort of seed their reputation on what Kevin may or may not do. So, they're sort of establishing themselves. And those comments were followed up by Lisa Cook, Philip Jefferson, um Austin Goulsby who does not vote, Neil Koskari who does vote because that's what this comes down to. If you are a central banker right now, your credibility, your reputation is on the line based on this reaceleration of inflation. Now, I think Kevin is going to do a good job. I think Kevin is the right person for this job. I think Kevin is uniquely qualified because of his market experience working for Stan Ducken Miller, but he's still going to be subject to the circumstances around him. He's still going to be subject to the macro. And if I were him, I would say, okay, I can't do anything here. I'm not going to respond to this inflation shock because it's energy prices until I know what the situation is with the straight. I can't cut rates because the market's just going to slap me across the head because they're so worried about inflation among other things. Just look at the long end of the yield curve. So, it's better to just sit and do nothing uh until these these circumstances play itself out particularly with Iran, particularly with the straight where you can then observe how quickly the supply chains normalize, how quickly do oil prices recede, and to what extent. I think commodities are in a bull market even when this war ends. I don't think oil is going back to $65. I think 85 is the new 65 and something I've been saying for the last couple of months. >> Yeah. >> And that's a reality that the market's going to have to uh adjust to too. Essentially, the stock market's been rallying since early April, believing we're about to get a deal. And here we are two months later, hopefully about to get a deal. Hopefully, this time is real. Um, so it'll be interesting to see how the stock market actually responds on the reality of an actual deal. >> Yeah. Yeah. I mean, you had that public bet on Kelchi with zero cuts in 2026 and, you know, according to the platform, that's trading around 64 cents. Are you still in it? >> So, the bond market right now, the Fed funds futures pricing at about 60% chance give or take, of a hike. Uh, I think that's a bit premature. I mean, we need to hear from Kevin. Uh, and again, we'll we'll we'll hear from him in a couple weeks. Uh, I I think circumstances as of right now, the Fed's not going to be cutting. Now, I don't necessarily think that they're going to hike, but the long end of the bond market has already hiked for them. The long end of the GGB market has already hiked for the BOJ. The long end of the European curve in Germany and France and certainly uh in England have already hiked. So, while we're hugely focused on what central bankers are going to do, the bond markets are saying, "Hey, we're not going to wait around. We're going to do it for you." >> I mean, you've raised the possibility that war shrinks the balance sheet, currently above 6 trillion, is kind of his primary tool for viewers who don't track this daily. I mean, why why does that number matter? Uh, I think Kevin and and one of the reasons why I always liked him was he was not on board with the decision of central bankers to play God over interest rates and that's what they did and in a very enhanced way under Greenspan Bernanki and certainly Yellen and Powell carried that mantle and Kevin is saying we need to reduce the footprint of the central bank in the econom economy and a main way of doing that is shrinking the balance sheet. The risk though is balance sheet transmission mechanism comes through the financial markets. So I mentioned before he's going to be subject to circumstances. What happens if he says you know what I want to take this balance sheet down to call it 5 trillion. Let's clip another trillion off. Now, depending on what his colleagues say and and and the regulatory structure and the reserve base with banks and whether that's able whether he was able to pull that off, but what happens if the S&P 500 drops 25% on that reduction of the balance sheet? >> Will he be so bold? You know, one thing I wrote a couple months ago when he was appointed, I said, "Will the will the real Kevin Walsh please stand up? Is it going to be the one that's just going to do Trump's bidding and just cut rates? Or is he going to stick to what he truly believes and maybe cut rates if he feel that's prudent based on the data or maybe have to hike and what he will do with the balance sheet? Um, now I'm not so confident that he's going to be able to get away with cutting the balance sheet too much. >> I just think he's going to be much more judicious and using it on the flip side. If we have a sovereign bond crisis and the 10-year yield jumps to five and a half to six, I don't think necessarily he's going to be so quick just to expand the Fed's balance sheet in a dramatic way. Now, that said, maybe he does because that's uh it'll be a different different circumstance, but I think he's just going to be more circumspect about using Fed tools to manipulate every market in every downturn. >> Here's something worth flagging. According to Bloomberg, $120 billion has flowed into money market funds this month alone. Repo rates are trading below the bottom of the Fed's target range. Some strategists are calling this a liquidity boom. I mean, does that complicate the tightening story? >> You know, the money market uh the money that's going to money markets to me, it's just money that continues to transition and search for yield. You know, when banks don't pay you much for your savings, you're going to put it into money markets. And now that we've had this recent uptick in bond yields, particularly on the short end, well, it pays even more to own in money market fund rather than a CD at a bank or uh in in a in in a in a savings account. So, that's why I I I I think we're seeing that that increase in money market accounts. But, yeah, I I think this also there's been regulatory changes. is the supplementary leverage ratio has been eased so banks have more liquidity to to to take on some more treasury inventory make some deeper markets which I think is a good thing but maybe that gives uh wars license to shrink that balance sheet being more confident that the there's enough liquidity that we won't see a spike in overnight repo rates if he does so >> I want to go to precious metals because obviously gold you know you you you know well it was above that $5,000 conflict starts inflation surges gold kind of sold off a little bit. Uh we established that liquidity event, not a broken thesis. But I I want to kind of get past the price because the real gold story isn't about whether it's, you know, goes back to 5,000. It's about what gold is actually is in the global monetary system right now and whether the role is changing. Just take us through that a little bit. >> Okay. So, you know, as you say, we know that central banks have been the big buyer over the past four years, >> but I think a a good sort of encapsulation of what gold now means for the global financial system is there was an edi not an editorial, there was an article in the Financial Times last week that talked about the growing market share, albeit off a very small base and still very low, the growing market share of the Chinese Juan in trans global transactions particularly in commodities particularly oil where the market share went from about 3% now is at about 8%. Not we're not going to a petroan just yet but it's less a petro dollar and understand that a lot of these transactions taking place in Juan and it could be also for agricultural products. It could be them buying uh soybeans from Argentina in Juan. It could be them buying corn from Brazil and Juan. And then those countries are taking that Juan and probably buying stuff back from uh China and India that doesn't that wants to buy Chinese oil and Russian oil but can't transact in dollars because of sanctions. They have no choice but to buy the wand. Well, the best asset to sort of settle a transaction or a balance of payments in balance instead of keeping money in one or uh or something else, it the gold is now this neutral asset >> that immediately can be bought with that wand on the Shanghai gold exchange. So I think it's just sort of a microcosm of the importance that gold is having both from a a central bank reserve asset from a payments of balance of payments settlement currency and that um I don't think enough people are really thinking about this this sort of big picture shift. >> Yeah. Yeah. And it's huge. I mean for decades countries sold commodities for dollars and and recycled those dollars into US Treasury bonds. you know, that kind of kept kept the long-term rates suppressed and it helped finance the US deficit. But I mean, according to the Federal Reserve data, foreign treasury holdings have gone from roughly 50% of the market a decade ago to about 30. So, is that capital just going into gold? >> It's going into gold. It's probably going to other commodities um and and it it's for for any domestic use that that countries uh might have. And it's interesting too outside of Japan which have has its own dynamic with an overnight rate of 75 basis points and inflation higher than that and a very domestic bond market but still having its issues. You look at the UK guilt market, it's about a third foreignowned. >> The French oat bond market about 50% foreignowned. The German uh bond market very highly foreignowned. And those are also bond markets that have been under pressure. So also highlighting my point earlier that these bond markets are now a source of funds. And I think that that's a very noteworthy sort of call out >> to these governments that they can't just assume that foreigners are going to have to are going to be buying their bonds and they're going to have to rely more so on domestic savings where there's some of these countries a der of it particularly in the US. I mean the the direct challenge, you know, this story has been told every cycle 20 years. The dollar is still roughly 80% of global transactions. Treasury is still clear. Gold sells off when things get stressed. What would actually tell you the gold thesis is wrong? >> That's a good question because being long gold, uh, I have to think about that all the time about when does this trade end, when does the time to get off. um you know from a portfolio management standpoint you know gold is an asset that everyone should own for the rest of their lives if you just look at the history of it uh because it's done nothing but go up and preserve people's purchasing power but from a portfolio management standpoint I think about that I think about hey maybe Kevin Walsh is going to be this hawk maybe he wants to really dramatically cut the balance sheet maybe he will even also raise the Fed funds rate maybe the dollar goes on this epic rally and sort of regains its presence. Maybe um the US government gets religion and that budget deficit relative to GDP goes to 3%. Maybe uh you can't rule anything out, but these are the things that I think investors should be thinking about uh being long uh at least in the short term. Now, I don't I think the the the reality of the situation is going to be very difficult for Kevin to get too hawkish because it can easily send the US economy into recession. And politically speaking, I don't think he's going to want to reside over that. Particularly, you know, Trump loves him today, but I don't think Trump's going to be a big fan if the economy is in a recession and he's not cutting interest rates. >> So, but those are the things that that that I'm thinking about from a portfolio management standpoint. >> And what about silver? I mean mid70s also flat today a little bit but you trimmed earlier this year on that vertical move. Where does silver stand in your framework right now? >> So we trimmed almost all of our silver in that move >> but I I I be have I I want to get back in because that supply demand deficit is still very much intact. Uh silver's down obviously dramatically from its peak what for 354% from its highs. So it's had that correction. uh I'm just waiting for things to sort of settle out and that period as I talked about earlier of consolidation digestion after that parabolic move needs to needs to now create a sort of a technical base but from a fundamental standpoint I think the fundamentals are still very much positive for silver I just need that technical setup uh to join that positive fundamental setup and I'm not sure yet when we'll get it but I think we're headed towards it >> okay good to hear uh so that was a little bit of the bottom I mean so many people got scared of that volatility just got too frothy both metals >> I I I believe so now can gold bottom at 4,000 instead of 4,400ish maybe can gold be bottoming today because it it it actually uh fell below its 200 day moving average and the last time I checked it regained it and actually went positive so gold is about $90 off its lows I don't know I'm not sure I'm not smart enough to know when the bottom is but uh I think after this pullback we've seen that really started in February. Um, you know, we're we're we're we're further along on on on this consolidation for sure. >> Yeah. Inside the US economy, there's kind of a specific set of signals that the market, according to many, has decided to kind of look past and and I think it's important to get to. I mean, you've been describing a K-shaped economy for months. Top of the K is that AI infrastructure as you mentioned that, you know, hyperscaler spending, uh, upper income consumers kind of resilient. The bottom would be manufacturing housing, lower and and middle inome households under pressure. And again, according to that, this morning's data from the BEA, disposable income has fallen three straight months. The savings rate 2.6. Uh CEO confidence dropped to 47 in Q2. Um, according to Walmart's own earnings, I mean, you were just talking about it there. That's that's pretty wild to hear the CEO basically say plainly. Um, what doesn't the market care about here? >> Well, I I think the market doesn't care about that divergence. >> Yeah, >> the market is loving the excitement and the economic contribution from the data center buildout. That's what's dominating. Market could care less about the parts of the economy that are in a recession. And that's because we know what dominates. you know, half the S&P now is touching AI data centers in some fashion. >> Almost 18% of the S&P 500 is now semiconductors. We've never gotten to that level before, I believe. Uh so that is what's dominating. So it's the the needed sustainability of that is what sustain is is what's keeping things afloat because as I said earlier, we're all in on this. >> So the bet has to pay off. But it's not a question of if, it's a question of when the level of spend slows down because Oracle can't make it spending 75% of their revenue on capex perpetually. Uh Meta is spending can't keep going spending half their revenue on capex. So at some point these companies are going to rain it in because the compute power is on a more sustainable basis and then they'll have maintenance capex thereafter which will be much more elevated than where it was before. So this is going to slow down at some point and the real benefits of Gen AI are going to acrue to the rest of us and they've already started to. So when that happens will there be you know cushions on the other side? Will we see an improvement in manufacturing? Will inflation uh abate that will allow lower to middle income consumers, you know, breathe aside relief? I'm not sure. >> Um and and that's what we're going to have to see >> because right now it's it's like I said, it's all in and there are no shock absorbers to that. >> Right. Right. To to your point, Peter, I mean, according to Pitch just this morning, private credit default rates have recently hit 6%, the highest they've ever recorded. you know, not tech companies, industrials, manufacturers, consumer products. I mean, for for viewers, yeah, healthcare. Um, for viewers who don't live in this market, I mean, private credit is is obviously lending by investment funds, not banks. It grew enormously post 2008 at zero rates. Uh, a significant amount of retail money has been directed into that. How serious is that 6% figure? Well, I it's not serious yet, but it's the trajectory that is worth noting because it is at a multi-year high. Now, Fitch has only started uh measuring default rates within this area of private credit since uh 2024. So, it's a very small universe, but we have been seeing this step up uh in that level. So it's important from that perspective but also the dynamic of private credit wanting to marry retail has sort of you know broken up to an extent and that net um inflow level has sort of balanced out between inflows and redemptions. >> So that means that private credit has to be more judicious with lending out uh money because of the less flows that are coming in. A lot of that money gets lent to private equity deals. So, private equity has to maybe source other areas of of financing. And for businesses generally that are getting direct loans from private credit as opposed to a private equity finance sponsored deal, um well, maybe their cost of capital goes up as a result. So now last month uh after private credit was talked about every day it's sort of fallen back behind uh the topic of discussion being semiconductors but uh it's still something that people should focus on. >> Yeah. I mean the the the argument against the stresses is kind of concentrated in sectors that we've already been impaired before any of this. Is this a pre-existing problem rather than something new breaking? Uh, I think private credit was a classic case of too much money, chasing not enough good loans. Yeah. >> And you're beginning to see some of those not enough good loans sort of rise to the surface. You know, there's certainly stress within this whole private equity credit community in the sense of of clogging up of a lot of companies that that aren't being monetizable and that you have, call it, some endowment that committed to X amount of private equity investments on the assumption that over that time frame they were going to get distributions that they would then reinvest in their future commitments. Well, those distributions have slowed to a crawl and they're now having to come up with new fresh capital. So, I I I I see a further clogging up of this private equity, private credit sort of ecosystem >> that um that that is that that feasted for many years on cheap money >> and of course money is is is not so cheap anymore. I I want to turn to the AI trade because there's an angle on it that you know almost nobody's covering and it connects back to commodities and you spoke about this a little bit before. We'll kind of get back to it because according to to YWIN, one of the largest Nvidia server manufacturers, data center component shortages will extend into 2027, 2028. I mean I think Micron recently crossed that trillion dollar market cap after a 19 single day surge. I mean buried into that report this morning too from the BEA computer software and accessory prices rose 5% in April. Now there was a study co-authored by former Fed chair or governor Steven Mirren in that core category kind of made and and this is his word an unprecedented contribution to core inflation from November through to March. So I mean the AI buildout is now showing up in the inflation data. You've been making the case that AI is obviously a physical story. We got land, copper, power, memory, not just software. Just remind people again why that matters. >> Well, on the memory side, uh HPQ or HP reported earnings uh yesterday and uh the stock, well, this morning was down. I have to see what it's done over the last couple hours. Even though the top line was fine, bottom line was not because of higher com component costs. And the CEO even mentioned it's not just memory and other component costs. It's, you know, the flow through of high oil prices and and and how what that flows through downstream. Uh and you know, the the if you if you go through a lot of the hyperscaler earnings calls and some of them raised their capex numbers, part of that capex increase was because of the higher cost of spend in terms of that that um raw material prices and also memory and uh and that's flowing through into retail. I mean, Dell and HP, they're not just going to sit there and eat all this. They're going to do what they can to raise uh prices to retail. So, I mean, and that's the thing with with with with that part of the um you know, of of the goods sector is, you know, for decades, we were only used to falling uh TV prices, falling PC prices, uh falling iPhone prices. Well, that that that is over for now. Eventually, we'll resume the downward trend, but for now, it's either companies are going to have to eat the higher prices or they're going to pass it on to retail. Even Apple is probably one of the greatest, you know, logistical sourcing companies in the world. And Tim Cook talked about on their last call that in the coming quarters, uh, the higher memory and component prices are going to be more pronounced. >> Yeah. And I think CDW's earnings commentary, I mean, customers are pulling forward memory orders on price fears, shortage concerns. If the conflict ends and those orders normalize or or say they get cancelled, what does that do to the AI trade? I mean, is this a 2027 story? Well, you bring up something very important what CDW said. And for those that don't know CDW, they have tens of thousands of customers selling into commercial, government, education, and health in a variety of different things. hardware, software, peripherals, so many different things. And it's one of my go-to companies when I'm looking for uh good information. And they talked about a pull forward going on. And I think you're seeing a pull forward throughout the economy, not just anything related to um hardware um but everything anything industrial because companies are trying to get ahead of price increases and they're trying to get ahead of threats of supply uh shortages and disruptions. >> And you have to believe that there's a lot of double and triple triple ordering that's going on because of this. Now, we of course won't know and uh until this war ends and you see to your point about whether we'll get order cancellations as things normalize, but I have to believe that's going on. I also have to believe that the inflection higher in manufacturing PMIs around the world over the past couple months has a lot to do with that pull forward of ordering of a of a variety of different things. >> I mean, you've argued China emerges from this conflict, you know, stronger. They they've reportedly offering AI models at roughly 75% below US pricing globally. I mean what what does the market understand that? I mean what what US companies are kind of competing against in the next 5 years. >> Yeah. I mean Deepseek in particular is offering their models at at sort of that discount relative to US providers uh which is dramatic. You also have you know we we think memory um chip production is just micron SanDisk and SKH highinex but China's developing their own memory uh and and storage uh semiconductor industry now when that matters for global supply and demand I don't know but it's coming and we saw Huawei talk about advancements that they're making on the chip side even though it's still going to play out over a multi-year time horizon but you know for the first time that I know outside of maybe Japan in the 80s. US tech is facing their most formidable competitor in China and we are in part responsible for that because we encourage China to develop their own uh technology base because we deprived them of a lot of our key technology. But whether one agreed with that approach or not, we are where we are and China is very far advanced in developing their own and in some areas they've gone past us in EVs. They've driven, no pun intended, well ahead of us, automation, robotics, and also the cost of electricity is half of what it takes to make something in the US. Um, that is also very notable in terms of their sort of cost of production and what they're going to be able to sell things on the global stage uh in competing with us and and other companies around the world. >> Peter, let's segue. I mean where we actually kind of put our money in this environment because again according to Goldman Sachs trading desk short interest in consumer staples, healthcare, utilities, it's near multi-deade highs. The median short interest in in healthc care is at a 30y year high according to the Bank of America. Fund managers are the most overweight equities since early 2022, approaching their internal sell signal. Now the ultra wealthy have sold over a billion dollars of stock in recent weeks and and you've been buying staples. you're on the other side of a very crowded trade. Uh just make the case for us. >> Yeah, thank you Jeremy. Uh because that's been my own personal pain trade has been long uh consumer staple stocks like those in food and and and products. Uh but I think right now while it's probably the most boring area of the market, it's certainly the most hated and I think there's potentially an inflection here. uh particularly if the war ends and we get some relief on package on on on polyethylene uh where ethylene prices generally and polyethylene and that ends up in packaging and resonance and and and so on that a lot of these food companies are relying on and aluminum prices whether you're talking about uh Coca-Cola and Pepsi and and and Hines uh Craft Hind and Reynolds Consumer Products Kimberly Clark all stocks that we own. And these companies aren't just sitting still. They're they're adjusting to uh the focus on health and wellness, on protein, uh on on getting their cost structure right. And uh I think that this is one of the more compelling areas, but certainly the probably the most hated area of the market and that we really like paying very nice dividend yields, very low valuations. And I know there's I I know selling ketchup and cream cheese is just not as exciting as as high bandwidth memory chips, but uh from a stock perspective, we find them pretty attractive. >> Yeah. I mean, you you just name names there. I mean, you know, Craft Hind what 7% dividend yield uh Mosaic in fertilizer. And you know, I'm looking at some of those and I'm thinking, is the AG is the agriculture complex kind of the next leg of the commodity bull here? I mean, for somebody that's never thought about fertilizer as a macro trade, kind of talk about that a little bit. >> So, I think it is. I think last year we had this precious metal industrial bull market that took off. I it obviously spread to energy with the war and I and I think a is next. Now we know with respect to nitrogen uh particularly ura that is sort of um uh blocked to a large extent coming out of the the the strait at least about a third of the world's um nitrogen supplies. uh but also sulf sulfur which is used to make sulfuric acid and ammonia where those are two key import uh uh inputs to making phosphate >> and mosaic as you mentioned stock that were long uh phosphate prices have not gone up to the same extent at which sulfuric acid and and ammonia prices have gone up. So they're cutting back on the production of phosphate. uh you have to assume that with the big jump in nitrogen prices that farmers are going to use less of it. So we're getting less fertilizer into the soil and eventually that will lead to higher crop prices. Now, that may not be reflected until the back half of the summer and as you enter harvest season, uh, call it October, November, but at some point, I do think you're going to see a price response in the big row crops like corn, soybean, and wheat that the farmer desperately needs to be able to afford the big rise in fertilizer prices. Unfortunately, those of us that eat every day, we're not going to be too happy about a big jump in crop prices because that's going to flow through into general food prices. Uh so that's the dynamic I think that you're in. But I do think there's an a bull market ahead of us both in terms of of crop prices and a further rise in fertilizer prices that will benefit the fertilizer producers. >> Yeah, it be interesting to see how that hits the pockets of those at home as you mentioned. I mean, getting back to gold for our Kicko audience, I mean, you hold it through volatility. What is the specific catalyst that that takes it back through, you know, the prior highs? And and I guess part of the other question is, is there a yield level that works against gold even with everything else in your favor? Well, the the thing that I want that I'm really interested in seeing over the next couple months, probably not going to be out until maybe July, August, is I want to see the pace at which central banks bought gold in Q2. Q1 they continued to buy, but we know two months out of the three were were we didn't have a war. >> Mhm. So when you saw news about Turkey monetizing some of their gold holdings, uh there's been chatter that Russia maybe has even trimmed some to finance their war. Uh I want to see what the pace of transactions took place with respect to central banks. Was gold truly a source of funds for some? Was it just talk and and negligible? That's what I want to see next because we know central banks have been that main bid. Uh I also want to see whether this this recent rise in real rates continues. Uh I think that's going to be key. And when the war ends and the straight reopens, does the dollar resume its downward trend? >> Yeah. >> Because I have to believe that and this really started last year with tariffs. Countries around the world realized that they need to diversify both their capital flows but also their trade flows. And does that diversification continue on and maybe get enhanced when the war ends and supply chains begin to normalize? >> Yeah. So, I mean, if Q2 buying slows, does that actually break the gold thesis a little bit or or would you see it as a temporary liquidity stress from energy importers needing cash? >> Yeah, I I I see it more as a temporary liquidity thing. I I think the pullback in gold has been more of a liquidity thing rather than a fundamental thing. Now again, higher real rates, higher dollars, negative for gold, but I see the pullback more so being uh a liquidity source of funds thing rather than a big fundamental thing because central banks are still obviously uh buying it. We'll just I'm just curious to see to what extent today and then when the war ends and they get some relief on those energy imports, do then they resume uh those gold purchases? >> I got to ask you quickly. I mean, our time always runs out too fast, but you reduce your Japan equity position after years of being kind of right on that trade. Is this thesis done? >> I don't think it's done, but I I I did start to think about the competition from an industrial manufacturing perspective from China. Um, you know, my friend Louie Gav always likes to say that when China enters a room, profits walk out the door because they're just such uh intensely competitive, hugely efficient um manufacturers. And that I saw more butdding of heads with respect to Japanese manufacturers and Chinese manufacturers. There's still a place for both. And I think that Takaichi is is is gonna be a good prime minister in terms of of of of keeping the Japanese economic growth story alive. And um but I I just felt like the market wasn't as expensive anymore and it was time to trim. I do think though that if the BOJ raises interest rates, which I think they'll do in June, I also I think that there's a a nice yen rally ahead of us. >> Interesting. >> And um I I think there could be a trade there as well. We're not there right now, but uh it's something that's very much on my radar. >> Yeah, I'll keep an eye on that uh in June. BOJ. Um okay, last question. Everything you've described, I mean the bond market, we talked about gold, private credit, the AI trade. I mean, what's the one thing markets have completely wrong right now? >> Uh, I I I think there's there's a level of of complacency and nonchalants with with the rise in long-term interest rates. Uh, maybe because we haven't reached a level that is alarming enough, but when we did see a few Fridays ago when we got above 4 and a half% in the 10-year, you know, the stock market actually, you know, cared for a couple days. I'm wondering if all of a sudden we go back above 4 and a half, we go to 4 and 3/4 >> that people start to further wake up to this reality that you know interest rates are no longer our friend. Central banks are no longer our friend and that um there is risk to you know a sovereign bond issue here that um um where debts and deficits matter, inflation matters. Um and as we talked about earlier that some of these heavily foreignowned bond markets become a further source of funds. >> Interesting market. Uh lots to to watch out for going into the summer. All right. Peter Bookvar, CIO at one point BFG Wealth Partners, the the book report of course daily on Substack. Uh Peter, always a great conversation when we have you on the show. I appreciate your time. >> Thanks Jeremy. Appreciate having me on. >> All right. Now the book report link is in the description. And if this gave you a framework you didn't have before, that's what we're here for every day. Like the video, subscribe if you haven't, share it with someone who needs to hear it. I'm Jeremy Saff and for all of us here at Kiko News, we'll see you next time. Heat. Heat.
The Real Reason Gold Dropped: It Is Becoming The World's 'Neutral Asset' – Peter Boockvar
Summary
The S&P 500 just hit all-time highs while inflation runs at 3.8% and real incomes fall for the third consecutive month. At the same …Transcript
Welcome back. I'm Jeremy Saffron. Oh, gold is trading around4 $4,500 roughly flat. Silver also around $74. Also little change. Platinum, palladium under pressure. But here's the bigger picture here. Earlier this year, gold was trading above $5,000 and now roughly 10 to 12% off of those highs. Now, that move lower happened while inflation surged, while oil spiked roughly 55% in a matter of weeks. And while global bond yields hit multi-deade highs, gold was supposed to perform exactly in that environment. And at the same time, a single semiconductor stock added $200 billion in market cap in one day. The S&P just hit all-time highs and is pushing towards new records again today on reports of a potential Iran ceasefire extension. and also some data. According to the Bureau of Economic Analysis, real incomes have fallen in three months in a row. Now, my guest today has been mapping every piece of this and getting it right. By the way, Peter Bookvar is CIO at 1BFG Wealth Partners, a $16 billion firm. He author uh authors the book report, the daily macro analysis on Substack that everyone feels like, or at least serious investors read before the market opens. He called the bond bare market before Wall Street was ready to hear it and he publicly bet zero Fed rate cuts in 2026 when the consensus was still pricing in several. Uh Peter, welcome back to Kit Kota. Good to see you. >> Good to see you too, Jeremy. Thanks for having me. >> Uh so I mean we can start here. Gold off of its highs, inflation just printed 3.8%. Is the bull case still intact? >> I I believe it is. I I I think what you're seeing in gold uh and also what you're seeing in silver is a digestion and a consolidation of the dramatic rise that we saw last year and the early part of this year. Uh we we know you can't sprint forever. You need to take a breather and I think that's exactly what's happening. Now granted that said we did we have seen a rise in real rates. That's typically a negative for gold within the algorithms. Uh the dollar is still hovering around this 100 level. If you look at the dollar index, that's a drag on gold. So, I think that those are the two main factors. And also more, it's hard to quantify, but I do think gold, as has been US treasuries along with other sovereign bonds, have been a source of funds for those countries that have them and that are having to subsidize their economy and their consumers uh if they are a heavy energy importer. >> Right. Right. So the investment case, you know, didn't break the conditions that triggered for selling did and governments maybe needed some liquidity. Gold was their most accessessible asset. Now, it's different than being wrong on gold. But we're going to get deep into this because what's actually happening goes well beyond most coverage is is telling you. But first, I got to get into this morning's numbers. And audience, stick with me. It's a lot of data, but it does set the context for everything. Now, the BC or the BAE rather this morning reported that PCE inflation up uh about 3.8% 8% year-over-year, highest since 2023. Nearly two full percentage points above the Fed's 2% target. I mean, core PCs stripping out food and energy came in at 3.3 year-over-year. Real disposable income fell for the fir first uh for the third consecutive month. And interesting, I mean, savings rate dropped 2.6%, lowest since 2022. Q1 GDP was revised down to 1.6 from that initial read of two. And and buried in this morning's report according to the BEA is corporate profits. I mean they they rose just.9% in Q1 and that follows a 6% advance in in quarter 4. Peter, uh what type of inflation is this? Because there's the inflation the Fed can fight and then there's inflation it cannot touch. Which is this? >> Well, it's sort of a combination. you know, you you have the conventional textbook inflation is a combination of excessive fiscal spending monetized by their central bank. Uh yeah, that that's partly the case. We have excessive government spending with uh the uh budget deficit relative to GDP still around 6% and obviously debt uh relative to the size of the economy uh in triple digits. Uh now the Fed is not necessarily monetizing it like they were uh during COVID, but they're still buying tea bills. The balance sheet is still very fat. >> But you also have this major supply disruption and you have higher energy prices and other commodity prices that flow through for a lot of different things. And I and I I like to tell economists that give me, you know, the conventional textbook saying, "Well, we're this is not in anymore." more. I might say, well, yeah, kind of it is. But also, the average consumer, the average business doesn't care where the cost of doing business and the cost of living is going up. They just care that it's happening. And whether you want to call it inflation or not, we have an inflation shock. We had it in 2000, 2001, 2000, I'm sorry, 2021 22. Obviously uh that has continued even with this pullback from the highs but now it's obviously reacelerating and there is it's not a coincidence that inflation is the major pain point that has resulted in the consumer confidence index as measured by University of Michigan being at a record low >> right and I mean you know that that headline this morning everyone's talking about that 3.8% at 8% inflation. Yeah, it feels like everyone's talking about it, but the more important line maybe that real DPI down.5% and real spending up only 0.1. So consumers are still spending but their income is shrinking. Is that the definition of of late cycle pressure or is the consumer actually cracking maybe just absorbing another inflation hit? >> So real spending, inflation adjusted spending in the month of April was up just onetenth. >> Yeah. And something really important to understand here too is that when we have you have this energy supply shock, this commodity supply shock, companies don't immediately raise prices. It takes call it two to three months for a rise in their material prices to flow through their cost of goods sold because the average cost customer or say the average company has stuff on the shelves >> that were procured before the war began. As that product runs down, as those shelves get refilled with current higher raw material prices, that's then when they respond either through productivity gains, slower hiring, or higher prices. So, this is something that is going to continue to unfold over the coming months and quarters if you don't see a sharp decline in oil prices and other commodity prices when this straight reopens. Mhm. I mean, you know, GDP too, according to the BA this morning, it was revised lower. You just talked a little bit about real incomes falling for three straight months. Is there a legitimate case the economy is slowing fast enough to, you know, bring inflation down on its own? >> Well, it's a it depends on which part of the economy you're in. Uh certainly with respect to the data center buildout, >> all you're seeing is prices go up. price of construction, the price of steel, the price of aluminum, the price of copper, the price of memory chips, uh the price of everything is going up within that ecosystem. And then other parts of the economy, you know, the cost of building a house, all your raw material prices have just gone up. Cost of labor is still very elevated. Uh obviously the cost to the consumer and everything that they're purchasing uh is going up. Now, will at some point we reach some demand destruction here? Maybe. And we we we're were reminded of that by Walmart last week. >> Mhm. >> Walmart in their conference call said that at $4.50 per gallon of gasoline. Now, they didn't give that price, but that's the average gallon according to AAA. They said for the first time since 2022, the average customer is buying less than 10 gallons of gasoline for their automobile. So, we reached a point at least there that consumers are p pulling back. Now, we need that to sort of arrest the increase in gasoline prices if it's not going to happen via a barrel of oil. Um, but maybe we're beginning to to reach that that that point where uh the demand side starts to falter from here. Now, now again, this is this is a two-speed economy. We all know that it's a two-speed stock market. It's either you're in the AI data center buildout or you're not. And in a way in terms of the aggregate, you know, we talked about GDP, GDP and Q1 was up 1.6%. That was the revision from two 150 basis points was due to data center buildouts. >> So that's the heavy concentration that we're seeing here. We are all in on this for better or for worse in terms of construction and data centers and the equity market performance that's benefiting from all that spend. >> Interesting. I got to talk about the AI trade in a moment. But first, the Fed because this puts Kevin Worsh in a in a, you know, difficult position. He's day six on the job. He got sworn in on May 22nd. President Trump says rates come down very quickly kind of same day within 48 hours. Governor Waller publicly says no rate cuts. Governor Bar said no balance sheet reduction before Worsh, you know, chairs a single meeting. Now, you said that wasn't a coincidence. What was it? >> Well, it was an interesting way for some of Kevin Marsh's new colleagues to sort of plant their flag and and establish their opinion uh because they don't necessarily know what Kevin's going to think. Now, I'm sure behind the scenes there are conversations going on and there will continue to be amongst the group heading into that June 16th and 17th meeting. But I do think that each of these central banks are not going to sort of seed their reputation on what Kevin may or may not do. So, they're sort of establishing themselves. And those comments were followed up by Lisa Cook, Philip Jefferson, um Austin Goulsby who does not vote, Neil Koskari who does vote because that's what this comes down to. If you are a central banker right now, your credibility, your reputation is on the line based on this reaceleration of inflation. Now, I think Kevin is going to do a good job. I think Kevin is the right person for this job. I think Kevin is uniquely qualified because of his market experience working for Stan Ducken Miller, but he's still going to be subject to the circumstances around him. He's still going to be subject to the macro. And if I were him, I would say, okay, I can't do anything here. I'm not going to respond to this inflation shock because it's energy prices until I know what the situation is with the straight. I can't cut rates because the market's just going to slap me across the head because they're so worried about inflation among other things. Just look at the long end of the yield curve. So, it's better to just sit and do nothing uh until these these circumstances play itself out particularly with Iran, particularly with the straight where you can then observe how quickly the supply chains normalize, how quickly do oil prices recede, and to what extent. I think commodities are in a bull market even when this war ends. I don't think oil is going back to $65. I think 85 is the new 65 and something I've been saying for the last couple of months. >> Yeah. >> And that's a reality that the market's going to have to uh adjust to too. Essentially, the stock market's been rallying since early April, believing we're about to get a deal. And here we are two months later, hopefully about to get a deal. Hopefully, this time is real. Um, so it'll be interesting to see how the stock market actually responds on the reality of an actual deal. >> Yeah. Yeah. I mean, you had that public bet on Kelchi with zero cuts in 2026 and, you know, according to the platform, that's trading around 64 cents. Are you still in it? >> So, the bond market right now, the Fed funds futures pricing at about 60% chance give or take, of a hike. Uh, I think that's a bit premature. I mean, we need to hear from Kevin. Uh, and again, we'll we'll we'll hear from him in a couple weeks. Uh, I I think circumstances as of right now, the Fed's not going to be cutting. Now, I don't necessarily think that they're going to hike, but the long end of the bond market has already hiked for them. The long end of the GGB market has already hiked for the BOJ. The long end of the European curve in Germany and France and certainly uh in England have already hiked. So, while we're hugely focused on what central bankers are going to do, the bond markets are saying, "Hey, we're not going to wait around. We're going to do it for you." >> I mean, you've raised the possibility that war shrinks the balance sheet, currently above 6 trillion, is kind of his primary tool for viewers who don't track this daily. I mean, why why does that number matter? Uh, I think Kevin and and one of the reasons why I always liked him was he was not on board with the decision of central bankers to play God over interest rates and that's what they did and in a very enhanced way under Greenspan Bernanki and certainly Yellen and Powell carried that mantle and Kevin is saying we need to reduce the footprint of the central bank in the econom economy and a main way of doing that is shrinking the balance sheet. The risk though is balance sheet transmission mechanism comes through the financial markets. So I mentioned before he's going to be subject to circumstances. What happens if he says you know what I want to take this balance sheet down to call it 5 trillion. Let's clip another trillion off. Now, depending on what his colleagues say and and and the regulatory structure and the reserve base with banks and whether that's able whether he was able to pull that off, but what happens if the S&P 500 drops 25% on that reduction of the balance sheet? >> Will he be so bold? You know, one thing I wrote a couple months ago when he was appointed, I said, "Will the will the real Kevin Walsh please stand up? Is it going to be the one that's just going to do Trump's bidding and just cut rates? Or is he going to stick to what he truly believes and maybe cut rates if he feel that's prudent based on the data or maybe have to hike and what he will do with the balance sheet? Um, now I'm not so confident that he's going to be able to get away with cutting the balance sheet too much. >> I just think he's going to be much more judicious and using it on the flip side. If we have a sovereign bond crisis and the 10-year yield jumps to five and a half to six, I don't think necessarily he's going to be so quick just to expand the Fed's balance sheet in a dramatic way. Now, that said, maybe he does because that's uh it'll be a different different circumstance, but I think he's just going to be more circumspect about using Fed tools to manipulate every market in every downturn. >> Here's something worth flagging. According to Bloomberg, $120 billion has flowed into money market funds this month alone. Repo rates are trading below the bottom of the Fed's target range. Some strategists are calling this a liquidity boom. I mean, does that complicate the tightening story? >> You know, the money market uh the money that's going to money markets to me, it's just money that continues to transition and search for yield. You know, when banks don't pay you much for your savings, you're going to put it into money markets. And now that we've had this recent uptick in bond yields, particularly on the short end, well, it pays even more to own in money market fund rather than a CD at a bank or uh in in a in in a in a savings account. So, that's why I I I I think we're seeing that that increase in money market accounts. But, yeah, I I think this also there's been regulatory changes. is the supplementary leverage ratio has been eased so banks have more liquidity to to to take on some more treasury inventory make some deeper markets which I think is a good thing but maybe that gives uh wars license to shrink that balance sheet being more confident that the there's enough liquidity that we won't see a spike in overnight repo rates if he does so >> I want to go to precious metals because obviously gold you know you you you know well it was above that $5,000 conflict starts inflation surges gold kind of sold off a little bit. Uh we established that liquidity event, not a broken thesis. But I I want to kind of get past the price because the real gold story isn't about whether it's, you know, goes back to 5,000. It's about what gold is actually is in the global monetary system right now and whether the role is changing. Just take us through that a little bit. >> Okay. So, you know, as you say, we know that central banks have been the big buyer over the past four years, >> but I think a a good sort of encapsulation of what gold now means for the global financial system is there was an edi not an editorial, there was an article in the Financial Times last week that talked about the growing market share, albeit off a very small base and still very low, the growing market share of the Chinese Juan in trans global transactions particularly in commodities particularly oil where the market share went from about 3% now is at about 8%. Not we're not going to a petroan just yet but it's less a petro dollar and understand that a lot of these transactions taking place in Juan and it could be also for agricultural products. It could be them buying uh soybeans from Argentina in Juan. It could be them buying corn from Brazil and Juan. And then those countries are taking that Juan and probably buying stuff back from uh China and India that doesn't that wants to buy Chinese oil and Russian oil but can't transact in dollars because of sanctions. They have no choice but to buy the wand. Well, the best asset to sort of settle a transaction or a balance of payments in balance instead of keeping money in one or uh or something else, it the gold is now this neutral asset >> that immediately can be bought with that wand on the Shanghai gold exchange. So I think it's just sort of a microcosm of the importance that gold is having both from a a central bank reserve asset from a payments of balance of payments settlement currency and that um I don't think enough people are really thinking about this this sort of big picture shift. >> Yeah. Yeah. And it's huge. I mean for decades countries sold commodities for dollars and and recycled those dollars into US Treasury bonds. you know, that kind of kept kept the long-term rates suppressed and it helped finance the US deficit. But I mean, according to the Federal Reserve data, foreign treasury holdings have gone from roughly 50% of the market a decade ago to about 30. So, is that capital just going into gold? >> It's going into gold. It's probably going to other commodities um and and it it's for for any domestic use that that countries uh might have. And it's interesting too outside of Japan which have has its own dynamic with an overnight rate of 75 basis points and inflation higher than that and a very domestic bond market but still having its issues. You look at the UK guilt market, it's about a third foreignowned. >> The French oat bond market about 50% foreignowned. The German uh bond market very highly foreignowned. And those are also bond markets that have been under pressure. So also highlighting my point earlier that these bond markets are now a source of funds. And I think that that's a very noteworthy sort of call out >> to these governments that they can't just assume that foreigners are going to have to are going to be buying their bonds and they're going to have to rely more so on domestic savings where there's some of these countries a der of it particularly in the US. I mean the the direct challenge, you know, this story has been told every cycle 20 years. The dollar is still roughly 80% of global transactions. Treasury is still clear. Gold sells off when things get stressed. What would actually tell you the gold thesis is wrong? >> That's a good question because being long gold, uh, I have to think about that all the time about when does this trade end, when does the time to get off. um you know from a portfolio management standpoint you know gold is an asset that everyone should own for the rest of their lives if you just look at the history of it uh because it's done nothing but go up and preserve people's purchasing power but from a portfolio management standpoint I think about that I think about hey maybe Kevin Walsh is going to be this hawk maybe he wants to really dramatically cut the balance sheet maybe he will even also raise the Fed funds rate maybe the dollar goes on this epic rally and sort of regains its presence. Maybe um the US government gets religion and that budget deficit relative to GDP goes to 3%. Maybe uh you can't rule anything out, but these are the things that I think investors should be thinking about uh being long uh at least in the short term. Now, I don't I think the the the reality of the situation is going to be very difficult for Kevin to get too hawkish because it can easily send the US economy into recession. And politically speaking, I don't think he's going to want to reside over that. Particularly, you know, Trump loves him today, but I don't think Trump's going to be a big fan if the economy is in a recession and he's not cutting interest rates. >> So, but those are the things that that that I'm thinking about from a portfolio management standpoint. >> And what about silver? I mean mid70s also flat today a little bit but you trimmed earlier this year on that vertical move. Where does silver stand in your framework right now? >> So we trimmed almost all of our silver in that move >> but I I I be have I I want to get back in because that supply demand deficit is still very much intact. Uh silver's down obviously dramatically from its peak what for 354% from its highs. So it's had that correction. uh I'm just waiting for things to sort of settle out and that period as I talked about earlier of consolidation digestion after that parabolic move needs to needs to now create a sort of a technical base but from a fundamental standpoint I think the fundamentals are still very much positive for silver I just need that technical setup uh to join that positive fundamental setup and I'm not sure yet when we'll get it but I think we're headed towards it >> okay good to hear uh so that was a little bit of the bottom I mean so many people got scared of that volatility just got too frothy both metals >> I I I believe so now can gold bottom at 4,000 instead of 4,400ish maybe can gold be bottoming today because it it it actually uh fell below its 200 day moving average and the last time I checked it regained it and actually went positive so gold is about $90 off its lows I don't know I'm not sure I'm not smart enough to know when the bottom is but uh I think after this pullback we've seen that really started in February. Um, you know, we're we're we're we're further along on on on this consolidation for sure. >> Yeah. Inside the US economy, there's kind of a specific set of signals that the market, according to many, has decided to kind of look past and and I think it's important to get to. I mean, you've been describing a K-shaped economy for months. Top of the K is that AI infrastructure as you mentioned that, you know, hyperscaler spending, uh, upper income consumers kind of resilient. The bottom would be manufacturing housing, lower and and middle inome households under pressure. And again, according to that, this morning's data from the BEA, disposable income has fallen three straight months. The savings rate 2.6. Uh CEO confidence dropped to 47 in Q2. Um, according to Walmart's own earnings, I mean, you were just talking about it there. That's that's pretty wild to hear the CEO basically say plainly. Um, what doesn't the market care about here? >> Well, I I think the market doesn't care about that divergence. >> Yeah, >> the market is loving the excitement and the economic contribution from the data center buildout. That's what's dominating. Market could care less about the parts of the economy that are in a recession. And that's because we know what dominates. you know, half the S&P now is touching AI data centers in some fashion. >> Almost 18% of the S&P 500 is now semiconductors. We've never gotten to that level before, I believe. Uh so that is what's dominating. So it's the the needed sustainability of that is what sustain is is what's keeping things afloat because as I said earlier, we're all in on this. >> So the bet has to pay off. But it's not a question of if, it's a question of when the level of spend slows down because Oracle can't make it spending 75% of their revenue on capex perpetually. Uh Meta is spending can't keep going spending half their revenue on capex. So at some point these companies are going to rain it in because the compute power is on a more sustainable basis and then they'll have maintenance capex thereafter which will be much more elevated than where it was before. So this is going to slow down at some point and the real benefits of Gen AI are going to acrue to the rest of us and they've already started to. So when that happens will there be you know cushions on the other side? Will we see an improvement in manufacturing? Will inflation uh abate that will allow lower to middle income consumers, you know, breathe aside relief? I'm not sure. >> Um and and that's what we're going to have to see >> because right now it's it's like I said, it's all in and there are no shock absorbers to that. >> Right. Right. To to your point, Peter, I mean, according to Pitch just this morning, private credit default rates have recently hit 6%, the highest they've ever recorded. you know, not tech companies, industrials, manufacturers, consumer products. I mean, for for viewers, yeah, healthcare. Um, for viewers who don't live in this market, I mean, private credit is is obviously lending by investment funds, not banks. It grew enormously post 2008 at zero rates. Uh, a significant amount of retail money has been directed into that. How serious is that 6% figure? Well, I it's not serious yet, but it's the trajectory that is worth noting because it is at a multi-year high. Now, Fitch has only started uh measuring default rates within this area of private credit since uh 2024. So, it's a very small universe, but we have been seeing this step up uh in that level. So it's important from that perspective but also the dynamic of private credit wanting to marry retail has sort of you know broken up to an extent and that net um inflow level has sort of balanced out between inflows and redemptions. >> So that means that private credit has to be more judicious with lending out uh money because of the less flows that are coming in. A lot of that money gets lent to private equity deals. So, private equity has to maybe source other areas of of financing. And for businesses generally that are getting direct loans from private credit as opposed to a private equity finance sponsored deal, um well, maybe their cost of capital goes up as a result. So now last month uh after private credit was talked about every day it's sort of fallen back behind uh the topic of discussion being semiconductors but uh it's still something that people should focus on. >> Yeah. I mean the the the argument against the stresses is kind of concentrated in sectors that we've already been impaired before any of this. Is this a pre-existing problem rather than something new breaking? Uh, I think private credit was a classic case of too much money, chasing not enough good loans. Yeah. >> And you're beginning to see some of those not enough good loans sort of rise to the surface. You know, there's certainly stress within this whole private equity credit community in the sense of of clogging up of a lot of companies that that aren't being monetizable and that you have, call it, some endowment that committed to X amount of private equity investments on the assumption that over that time frame they were going to get distributions that they would then reinvest in their future commitments. Well, those distributions have slowed to a crawl and they're now having to come up with new fresh capital. So, I I I I see a further clogging up of this private equity, private credit sort of ecosystem >> that um that that is that that feasted for many years on cheap money >> and of course money is is is not so cheap anymore. I I want to turn to the AI trade because there's an angle on it that you know almost nobody's covering and it connects back to commodities and you spoke about this a little bit before. We'll kind of get back to it because according to to YWIN, one of the largest Nvidia server manufacturers, data center component shortages will extend into 2027, 2028. I mean I think Micron recently crossed that trillion dollar market cap after a 19 single day surge. I mean buried into that report this morning too from the BEA computer software and accessory prices rose 5% in April. Now there was a study co-authored by former Fed chair or governor Steven Mirren in that core category kind of made and and this is his word an unprecedented contribution to core inflation from November through to March. So I mean the AI buildout is now showing up in the inflation data. You've been making the case that AI is obviously a physical story. We got land, copper, power, memory, not just software. Just remind people again why that matters. >> Well, on the memory side, uh HPQ or HP reported earnings uh yesterday and uh the stock, well, this morning was down. I have to see what it's done over the last couple hours. Even though the top line was fine, bottom line was not because of higher com component costs. And the CEO even mentioned it's not just memory and other component costs. It's, you know, the flow through of high oil prices and and and how what that flows through downstream. Uh and you know, the the if you if you go through a lot of the hyperscaler earnings calls and some of them raised their capex numbers, part of that capex increase was because of the higher cost of spend in terms of that that um raw material prices and also memory and uh and that's flowing through into retail. I mean, Dell and HP, they're not just going to sit there and eat all this. They're going to do what they can to raise uh prices to retail. So, I mean, and that's the thing with with with with that part of the um you know, of of the goods sector is, you know, for decades, we were only used to falling uh TV prices, falling PC prices, uh falling iPhone prices. Well, that that that is over for now. Eventually, we'll resume the downward trend, but for now, it's either companies are going to have to eat the higher prices or they're going to pass it on to retail. Even Apple is probably one of the greatest, you know, logistical sourcing companies in the world. And Tim Cook talked about on their last call that in the coming quarters, uh, the higher memory and component prices are going to be more pronounced. >> Yeah. And I think CDW's earnings commentary, I mean, customers are pulling forward memory orders on price fears, shortage concerns. If the conflict ends and those orders normalize or or say they get cancelled, what does that do to the AI trade? I mean, is this a 2027 story? Well, you bring up something very important what CDW said. And for those that don't know CDW, they have tens of thousands of customers selling into commercial, government, education, and health in a variety of different things. hardware, software, peripherals, so many different things. And it's one of my go-to companies when I'm looking for uh good information. And they talked about a pull forward going on. And I think you're seeing a pull forward throughout the economy, not just anything related to um hardware um but everything anything industrial because companies are trying to get ahead of price increases and they're trying to get ahead of threats of supply uh shortages and disruptions. >> And you have to believe that there's a lot of double and triple triple ordering that's going on because of this. Now, we of course won't know and uh until this war ends and you see to your point about whether we'll get order cancellations as things normalize, but I have to believe that's going on. I also have to believe that the inflection higher in manufacturing PMIs around the world over the past couple months has a lot to do with that pull forward of ordering of a of a variety of different things. >> I mean, you've argued China emerges from this conflict, you know, stronger. They they've reportedly offering AI models at roughly 75% below US pricing globally. I mean what what does the market understand that? I mean what what US companies are kind of competing against in the next 5 years. >> Yeah. I mean Deepseek in particular is offering their models at at sort of that discount relative to US providers uh which is dramatic. You also have you know we we think memory um chip production is just micron SanDisk and SKH highinex but China's developing their own memory uh and and storage uh semiconductor industry now when that matters for global supply and demand I don't know but it's coming and we saw Huawei talk about advancements that they're making on the chip side even though it's still going to play out over a multi-year time horizon but you know for the first time that I know outside of maybe Japan in the 80s. US tech is facing their most formidable competitor in China and we are in part responsible for that because we encourage China to develop their own uh technology base because we deprived them of a lot of our key technology. But whether one agreed with that approach or not, we are where we are and China is very far advanced in developing their own and in some areas they've gone past us in EVs. They've driven, no pun intended, well ahead of us, automation, robotics, and also the cost of electricity is half of what it takes to make something in the US. Um, that is also very notable in terms of their sort of cost of production and what they're going to be able to sell things on the global stage uh in competing with us and and other companies around the world. >> Peter, let's segue. I mean where we actually kind of put our money in this environment because again according to Goldman Sachs trading desk short interest in consumer staples, healthcare, utilities, it's near multi-deade highs. The median short interest in in healthc care is at a 30y year high according to the Bank of America. Fund managers are the most overweight equities since early 2022, approaching their internal sell signal. Now the ultra wealthy have sold over a billion dollars of stock in recent weeks and and you've been buying staples. you're on the other side of a very crowded trade. Uh just make the case for us. >> Yeah, thank you Jeremy. Uh because that's been my own personal pain trade has been long uh consumer staple stocks like those in food and and and products. Uh but I think right now while it's probably the most boring area of the market, it's certainly the most hated and I think there's potentially an inflection here. uh particularly if the war ends and we get some relief on package on on on polyethylene uh where ethylene prices generally and polyethylene and that ends up in packaging and resonance and and and so on that a lot of these food companies are relying on and aluminum prices whether you're talking about uh Coca-Cola and Pepsi and and and Hines uh Craft Hind and Reynolds Consumer Products Kimberly Clark all stocks that we own. And these companies aren't just sitting still. They're they're adjusting to uh the focus on health and wellness, on protein, uh on on getting their cost structure right. And uh I think that this is one of the more compelling areas, but certainly the probably the most hated area of the market and that we really like paying very nice dividend yields, very low valuations. And I know there's I I know selling ketchup and cream cheese is just not as exciting as as high bandwidth memory chips, but uh from a stock perspective, we find them pretty attractive. >> Yeah. I mean, you you just name names there. I mean, you know, Craft Hind what 7% dividend yield uh Mosaic in fertilizer. And you know, I'm looking at some of those and I'm thinking, is the AG is the agriculture complex kind of the next leg of the commodity bull here? I mean, for somebody that's never thought about fertilizer as a macro trade, kind of talk about that a little bit. >> So, I think it is. I think last year we had this precious metal industrial bull market that took off. I it obviously spread to energy with the war and I and I think a is next. Now we know with respect to nitrogen uh particularly ura that is sort of um uh blocked to a large extent coming out of the the the strait at least about a third of the world's um nitrogen supplies. uh but also sulf sulfur which is used to make sulfuric acid and ammonia where those are two key import uh uh inputs to making phosphate >> and mosaic as you mentioned stock that were long uh phosphate prices have not gone up to the same extent at which sulfuric acid and and ammonia prices have gone up. So they're cutting back on the production of phosphate. uh you have to assume that with the big jump in nitrogen prices that farmers are going to use less of it. So we're getting less fertilizer into the soil and eventually that will lead to higher crop prices. Now, that may not be reflected until the back half of the summer and as you enter harvest season, uh, call it October, November, but at some point, I do think you're going to see a price response in the big row crops like corn, soybean, and wheat that the farmer desperately needs to be able to afford the big rise in fertilizer prices. Unfortunately, those of us that eat every day, we're not going to be too happy about a big jump in crop prices because that's going to flow through into general food prices. Uh so that's the dynamic I think that you're in. But I do think there's an a bull market ahead of us both in terms of of crop prices and a further rise in fertilizer prices that will benefit the fertilizer producers. >> Yeah, it be interesting to see how that hits the pockets of those at home as you mentioned. I mean, getting back to gold for our Kicko audience, I mean, you hold it through volatility. What is the specific catalyst that that takes it back through, you know, the prior highs? And and I guess part of the other question is, is there a yield level that works against gold even with everything else in your favor? Well, the the thing that I want that I'm really interested in seeing over the next couple months, probably not going to be out until maybe July, August, is I want to see the pace at which central banks bought gold in Q2. Q1 they continued to buy, but we know two months out of the three were were we didn't have a war. >> Mhm. So when you saw news about Turkey monetizing some of their gold holdings, uh there's been chatter that Russia maybe has even trimmed some to finance their war. Uh I want to see what the pace of transactions took place with respect to central banks. Was gold truly a source of funds for some? Was it just talk and and negligible? That's what I want to see next because we know central banks have been that main bid. Uh I also want to see whether this this recent rise in real rates continues. Uh I think that's going to be key. And when the war ends and the straight reopens, does the dollar resume its downward trend? >> Yeah. >> Because I have to believe that and this really started last year with tariffs. Countries around the world realized that they need to diversify both their capital flows but also their trade flows. And does that diversification continue on and maybe get enhanced when the war ends and supply chains begin to normalize? >> Yeah. So, I mean, if Q2 buying slows, does that actually break the gold thesis a little bit or or would you see it as a temporary liquidity stress from energy importers needing cash? >> Yeah, I I I see it more as a temporary liquidity thing. I I think the pullback in gold has been more of a liquidity thing rather than a fundamental thing. Now again, higher real rates, higher dollars, negative for gold, but I see the pullback more so being uh a liquidity source of funds thing rather than a big fundamental thing because central banks are still obviously uh buying it. We'll just I'm just curious to see to what extent today and then when the war ends and they get some relief on those energy imports, do then they resume uh those gold purchases? >> I got to ask you quickly. I mean, our time always runs out too fast, but you reduce your Japan equity position after years of being kind of right on that trade. Is this thesis done? >> I don't think it's done, but I I I did start to think about the competition from an industrial manufacturing perspective from China. Um, you know, my friend Louie Gav always likes to say that when China enters a room, profits walk out the door because they're just such uh intensely competitive, hugely efficient um manufacturers. And that I saw more butdding of heads with respect to Japanese manufacturers and Chinese manufacturers. There's still a place for both. And I think that Takaichi is is is gonna be a good prime minister in terms of of of of keeping the Japanese economic growth story alive. And um but I I just felt like the market wasn't as expensive anymore and it was time to trim. I do think though that if the BOJ raises interest rates, which I think they'll do in June, I also I think that there's a a nice yen rally ahead of us. >> Interesting. >> And um I I think there could be a trade there as well. We're not there right now, but uh it's something that's very much on my radar. >> Yeah, I'll keep an eye on that uh in June. BOJ. Um okay, last question. Everything you've described, I mean the bond market, we talked about gold, private credit, the AI trade. I mean, what's the one thing markets have completely wrong right now? >> Uh, I I I think there's there's a level of of complacency and nonchalants with with the rise in long-term interest rates. Uh, maybe because we haven't reached a level that is alarming enough, but when we did see a few Fridays ago when we got above 4 and a half% in the 10-year, you know, the stock market actually, you know, cared for a couple days. I'm wondering if all of a sudden we go back above 4 and a half, we go to 4 and 3/4 >> that people start to further wake up to this reality that you know interest rates are no longer our friend. Central banks are no longer our friend and that um there is risk to you know a sovereign bond issue here that um um where debts and deficits matter, inflation matters. Um and as we talked about earlier that some of these heavily foreignowned bond markets become a further source of funds. >> Interesting market. Uh lots to to watch out for going into the summer. All right. Peter Bookvar, CIO at one point BFG Wealth Partners, the the book report of course daily on Substack. Uh Peter, always a great conversation when we have you on the show. I appreciate your time. >> Thanks Jeremy. Appreciate having me on. >> All right. Now the book report link is in the description. And if this gave you a framework you didn't have before, that's what we're here for every day. Like the video, subscribe if you haven't, share it with someone who needs to hear it. I'm Jeremy Saff and for all of us here at Kiko News, we'll see you next time. Heat. Heat.