In laying out the schedule for an investment theme for 2025 podcast series for the CFA Society Chicago, my mind kept coming back to inflation and commodities. I knew I wanted to start by thinking about the commodity asset class, which let’s face it, is rarely where most people want to start. However, I have been writing a lot about inflation, and recently gold, and so it was a natural place for me.
I was glad to be joined by Mike McGlone, the Commodity Strategist at Bloomberg Intelligence, who has a long career in trading commodities and can give a great perspective. I hope you enjoy the podcast which I have attached (audio only) but if you prefer, you can also go to any podcast app and find it under CFA Society Chicago.
I will leave you with a couple of posts I did on LinkedIn this week, which talked about gold and gold standards, and the impact on the economy.
Stay Vigilant!
Chart of the Day - return to gold standard?
There's been a lot of buzz around gold. With prices at all-time highs, this shouldn't be surprising. However, the news flow has gotten quite interesting
Is there US gold in Ft. Knox or is it all gone?
Why are all of the planes from London to US carrying 2-4 tons of gold?
Should the US revalue the gold on its balance sheet from $42 to market levels ($2935)? To $5000? To $100,000?
Does the US want to return to the gold standard?
This last one came from my son who usually don't care about economics but when he does, he tends to ask some really good questions.
Does the US? Should the US?
I believe the source comes straight from the Treasury Secretary Bessent who is a bit of a gold bug. After his confirmation, Bessent expressed his commitment to "eliminating taxes, replacing them with a fair consumption tax & adopting a gold-backed currency."
Interesting that the "new" currency proposed in the last 18 months - BRICS - was meant to be a gold-backed currency
Let's assume we go back to a gold standard, which the US left in 1971, what would be the result?
With gold reserves backing the US currency the Dollar would gain relative strength versus its peers. With the concern over how much or how fast central banks & govt are de-basing fiat, the Dollar would soar
Just the Dollar move along would bring about deflationary pressures as goods from abroad, even with tariffs, would look much cheaper. This sounds great right?
Not so fast. What else would happen? The biggest constraint from a gold standard is the constraint on money supply growth or money creation. This is why the dollar would soar. This is the concern of many in the market
To remember, central banks create M0 or bank reserves. M1 & M2 are created by commercial banks in their extension of credit. Central banks can add reserves & banks not lend it out & the economy is not impacted
We saw this after the GFC when QE was thought to create unpalatable inflation & 100 economists signed a letter int he WSJ. Nothing happened & soon Obama was urging the banks to lend
However, if M0 is not created, then banks have no reason to create more M1 & M2. Thus, if money creation is zero or even negative, the extension of credit in the economy dries up
I show in the chart today gold vs. US consumer credit. As the US left the gold standard, gold prices have moved a lot higher. The dollar has effectively devalued. However, US consumer credit creation, which was relatively non-existent before 1971, has gone to the moon
You can get credit for everything. Think about it. You can order a pizza and do buy now, pay later. You can use your credit card (stored in your app) to pay for everything. Credit cards are an extension of credit
What would life be like without credit? While it's not been equal, the US standard of living has gone up a lot since '71
Do we really want a return to the gold standard? Thoughts?
Chart of the Day - how important is credit?
Yesterday I talked about the gold standard and the extension of credit. I showed that while the dollar has devalued since we left the gold standard in 1971, the extension of US consumer credit has exploded as well. A return to the gold standard would certainly reduce the extension of credit
Is this a good thing? After all, many would say we have too much debt.
This is kinda of true. In fact, since the Great Financial Crisis, the make up if US debt has changed considerably
In 2007, consumer debt to GDP was about 99%. In 2024, this number had fallen to 70%. Thus, while the aggregate debt might be large, as a percentage of the size of the economy, consumers are being more frugal
In 2008, corporate debt to GDP was about 73%. In 2024, it stands at 78%. It had initially fallen but with rates at all-time lows, companies borrowed more. As a shareholder you want them to optimize their balance sheet given mkt conditions. The amount overall is not onerous
The big change? Uncle Same (and I don't mean Samuel L. Jackson). In 2008, US govt debt to GDP was 55%. In 2024, it is 120%. The direction is only higher as this is not including unfunded liabilities
Let's step back and look if this debt matters to the US economy. The chart today shows the US consumer debt, commercial & industrial loans outstanding, the M2 money supply (banks extension of credit) and US GDP
I think it is pretty clear all are tied at the hip. I think it is clear that the extension and growth of credit, has grown the US economy. The implication would then be that a reduction in this growth of credit, would likely mean a shrinking of the economy
What is the benefit of the gold standard? It imposes a discipline on the govt. If there are bad policies, investors or other countries turn in their dollars and ask for gold. There is an explicit limit to how far the bad policies can go
If a country has good policies, it keeps its gold. Maybe even grows its gold. This is a good thing
However, if a country has good policies, its currency will strengthen and the economy will grow. Consumers and companies will get more wealthy
Thus, the gold standard seems to be simply a check on bad govt policy. There is value in this because all govts have shown a proclivity toward bad policies, or at least the lack of appreciation for unintended consequences of policies that end up causing problems
I would take door number 2 that is some other check and balance on bad policies that allows for a freely floating FX rate, the free movement of capital and independent monetary policy that can help in times of crisis, but then should be unwound when times are good
You can't have a fixed exchange rate, independent monetary policy & the free movement of capital as Mundell & Fleming tell us. Which one do we want to give up?
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