A Gold Bull Not a Gold Bug
Featuring Marc Chandler
Published on: September 5th, 2019 • Duration: 10 minutesMarc Chandler, chief market strategist at Bannockburn Global Forex, tells Ed Harrison why he is bullish on gold, but not a “gold bug.” Chandler argues that the yellow metal is set for a breakout considering its recent bull run, rising geopolitical tensions, and the abundance of negative yielding bonds. He argues that gold will not be the basis for a new financial system, but rather will evolve as a financial alternative. This clip is excerpted from a video published on Real Vision on August 19, 2019 entitled “Long Gold, Short Renminbi.”
ED HARRISON: I saw by the way- this was probably a few days ago that you tweeted something out about that you're not a gold bug, but you're bullish on gold. And so in the context of all the currency stuff that we're talking about, I thought that was interesting. You told me at some point earlier that you think this 48-year experiment that we have with Bretton Woods that it seems like they're agents that are hedging against where this is headed. Because of all the volatility we're seeing from a geopolitical perspective. Can you put some meat on that?
MARC CHANDLER: Yeah, sure. I hear it about gold, but I just know some people are like religious zealots, who just gold is going to be- gold, always want to have gold. It's always going to be in a bull market. There's never enough of it, everything we've mined is we still have, there's the whole bull story for it. And I never really bought into that.
But what I'm seeing now several different factors. And I like to think there's not just one factor, we make an investment decision, we need more than just one reason. First for me was I saw gold taking out 1400 dollars, which was a key short point. Secondly, as you know, we've got today, we've got something like $15 trillion of negative yielding bonds.
One of my problems with gold historically is that gold is a noninterest bearing security. And it costs you if you're going to have serious money in it. It's going to cost you for storage, maybe for insurance. And it's not giving you a yield. So you got to pay good money just to protect this old investment. But now that interest rates are so low, and negative, I think we've got like a quarter a third of all bonds, in negative yielding.
I think gold looks more attractive like that. But also to geopolitics. And I think that the US might be abandoning under Trump the strong dollar policy, which means to me that the US is implicit threat to devalue the dollar to either boost trade or to reduce our debt burden. And I think that, at the same time we're doing that, there has been a weaponization not so much of the price of the dollar, but access to it. It used to be the US would provide this almost as utility for the world, public good. It is what it means to be a hegemonic power, that we were the only one who could do that.
And that we are now saying it's not a utility, it's not a public good, we will use access to the dollar market to the funding market, to the most liquid market areas. We're going to use it to reward our friends and punish our enemies. Our enemies are just people we don't like, who don't do what we want them to do. And so with this weaponization, I think it's encouraging other countries to build up, as an alternative, gold holdings. And so I'm watching China's buying gold almost every month, same thing with Russia, other central banks seem to be buying gold.
I don't think that the new monetary regime, as such, will be based on gold. I think it's ultimately, there's not enough gold, or the price is so much lower than what I think what it has to be. But in the short run, negative interest rates, the geopolitics, I can see gold- so I look at the market and say, well, where can I find 20%? And we took out that 1400 dollars in gold, I thought we can see 20% there, which gives me $1680, $1700. dollars. And that's my target early next year.
ED HARRISON: Now, when you talked about this before, I was talking to you about it- from the geopolitical perspective, you were talking about the swap lines between central banks. Can you elaborate a little bit more on that and how that plays into this?
MARC CHANDLER: In past crises, the US, G7 countries intervene in the foreign exchange market. I think about the Plaza Agreement in '85. I think about the Louvre Agreement in '87. Now, these were attempts for the G7 countries to try to manage the currencies. And those days I think are gone. But what happened during the Great Financial Crisis was rather than intervene in this to control the price of the currency, we had to make the problem with access to dollars, because the funding market for many foreign banks dried up.
And so the Federal Reserve offered swap lines to foreign countries, many of them. And so they would be able to give those dollars then. They've swapped the dollars for the local currency and unwind that, but they'd give those dollars that they got to local banks who needed them. And so maybe that becomes the architecture of the new financial order. And it seemed like the Chinese seem to believe so because shortly around the crisis, they also began extending the swap lines.
The problem is the reason that the dollar swap is so important is that many countries had dollar funding challenges. Our money market dried up, the CPE market dried up. In China's case, there's not a lot of RMB funding out there. And so the swap line seemed to have another purpose. First, I'd say that they might think it's like this cat's cradle of the old financial network with the swap lines.
But I suspected a more political element here too. Recently, Turkey exercised a swap line with China, not because they needed the RMB, they needed dollars to bolster their reserves. So China, I think is in a position. They have $3 trillion in reserves, they have plenty of money, it would appear. And they have many swap lines as one way that they can project their power and influence- whether it becomes this prototype of a new financial architecture, I doubt. Partly, again, because of how these currencies are used. The Swiss franc, the yen, the dollar, these are funding currencies. The RMB is not.
ED HARRISON: Just to position everything that you've been saying, from my perspective, it sounds like what you're saying is we're going through a volatile period and access to dollars is critical in that period. People are deciding whether and how they can change the financial architecture because of that, but still access to dollars is critical. And it brings up my question about basis swaps. A lot of people have talked about that, as the basis swap becoming more expensive as a sign of stress in the system. Can you talk to us about what you're seeing?
MARC CHANDLER: Yeah, sure. So the basis swap is a measure of the accessibility of dollars. And was priced by is plus or minus to Libor. So, you get the Libor interest rate differential between, say, the US and the eurozone, we have that. And on top of that, that's where the basis comes in. This, right now, I think about 35 basis points more for three months, there you have to pay 35 basis points above Libor to secure your dollars.
There's a lot of things that influence the accessibility of dollars. Most recently, many people got excited about it, because they have spiked, showing a dollar shortage. But part of the problem is not over there, the demand for it, it was over here in the US. And I'd watched the debt ceiling debate. When we were approaching the debt ceiling, the Treasury ran down the dollar holding to stay within the debt ceiling, when Congress and President signed off on lifting the debt ceiling and the spending caps, all of a sudden, the Treasury had to rebuild their bill off, their bills in their portfolio that they had run down. As they did this, this drain dollars from the system.
So that will push basis swaps draining the dollars, creating that shortage. Typically, I'd say that you get the most squeeze on these basis swaps at quarter-end and at yearend. For the most part, they're not significant. And they're not significant for our purposes for macro to like any kind of macro signal. But when there's stress in the system, they become more important because now, one of the reasons why it goes up is because we, the US banks, charge foreign banks greater amount of access to those dollars. But right now, I'd say the most recent hiccup, if you will, was really created by- it's really centered around US domestic policy and the debt ceiling.
ED HARRISON: So you're not concerned that it's any symbol that the financial system is about to see an accident of some sort?
MARC CHANDLER: I think that this financial system has so many moving parts and it's amazing thing. If there's 100 moving parts, and each part only had one in 100th chance of blowing up, we have 100 parts, it looks like someone's going to blow up. And so I think that our system is so complex, that we could have an accident. But I don't see a major imbalance that's created right now. I know people are talking about CLOs, the collateralized loan obligations. They talk about the BBBs in the corporate bond space. But these are- everybody's focused on this. We all know this.
I think that typically, a crisis takes place when we're not expecting it. When we're not looking for it. And so any place without looking becomes a suspect. But right now, I'd say their biggest challenge probably is not financial issues, though. We were talking about there's some large banks in Europe that might be having some problems. But the bigger problem, I think the most serious challenge for investors right now is really coming from the trade tensions and the implication it has for world growth. And then that's where the reaction function of central banks easing rates to offset a sharp slowdown in some countries.
ED HARRISON: Well, I think I'm going to leave it there. I actually had some questions for you about Bitcoin, but I will save that for another time. So your overall thesis is that we're going to continue to see the dollar topping out here and that it's going to roll over and that you are not long the dollar, you're looking for the dollar to fade.
MARC CHANDLER: Exactly. It reminds me of a cartoon I saw recently. I had one guy carrying a sign saying, "The end is nigh." And another guy says, "Why are you so optimistic? This is going to last forever."