Dr. Mark Thornton: Early Innings for Gold, Silver Manipulation, Black Swans & Failing Markets

Key Concepts

Gold as Money: The historical and fundamental role of gold as a store of value and medium of exchange.
Fiat Currency: Currency that is not backed by a physical commodity like gold, but by government decree.
Inflation: A general increase in prices and fall in the purchasing value of money.
Government Debt and Spending: The increasing reliance of governments on borrowing and spending, leading to currency devaluation.
Central Bank Actions: The role of central banks in managing currency, interest rates, and their impact on the economy.
Austrian Economics vs. Keynesian Economics: Contrasting economic philosophies regarding government intervention, market control, and the nature of money.
Business Cycle: The cyclical fluctuations in economic activity, often driven by interest rate manipulation according to Austrian economics.
Economic Inequality: The widening gap between the wealthy and the working class, exacerbated by central bank policies.
Precious Metals Market: The dynamics of gold and silver markets, including investment demand, industrial use, and potential manipulation.
Cryptocurrency: The emergence of digital currencies and their potential role in a future monetary system.
Bubbles: Unsustainable price increases in assets driven by speculation and easy credit, leading to eventual crashes.
Contagion: The spread of financial distress from one market or institution to others.
Monetization of Gold: The potential for gold to regain its status as a primary reserve asset or even a direct form of currency.

Gold: The Enduring Monetary Metal in a Fiat System

Dr. Mark Thornton, an economist and senior fellow at the Mises Institute, discusses the fundamental nature of gold as money and its current role within a global financial system increasingly dominated by fiat currency. He argues that despite its historical significance, governments have actively worked to decouple currency from gold over the last 50 years, leading to a cascade of economic problems.

The Historical and Current Role of Gold

Gold as Money: Gold has served as money for thousands of years. Its transition away from being a commodity-backed currency to a fiat system has been a deliberate process by governments to wean populations off commodity money.
Performance of Gold: Over the last 50-55 years, gold has performed comparably to leading stock markets. While this might seem positive, Thornton views it as a sign of trouble, indicating excessive government spending, borrowing, and currency inflation.
Central Bank Mistrust: Even central banks, Thornton notes, do not trust each other. They are all engaged in inflating their currencies to facilitate government spending and debt accumulation, with no apparent end in sight.
Current Market Trends: The recent surge in gold and silver prices is directly linked to the declining credibility of governments and central banks. This trend is expected to continue as long as governments persist on their current path of intervention and spending.

The Precious Metals Bull Run: Early Stages and Drivers

Central Bank Buying: Central bank purchases of gold are identified as a significant driver of the current bull run, stemming from a distrust in the US dollar and government bonds.
Spreading Awareness: While central banks initiated the trend, the message is spreading slowly to the general public. Many individuals remain unaware of the situation, their attention focused on stock markets and the AI boom.
Investor Inaction: The "man on the street" is unlikely to consider precious metal investments until their stock portfolios begin to decline. This suggests that the current bull run is still in its early stages from a retail investor perspective.
Portfolio Allocation: The amount of gold and silver in typical investor portfolios remains very small, concentrated among dedicated "stackers" and central banks. The recent entry of broader investors into gold and, even more recently, into precious metal mining stocks, indicates the nascent stage of this market expansion.
Signs of Caution: A potential indicator of caution would be when politicians publicly acknowledge the problem of inflation and actively seek solutions, rather than engaging in behind-the-scenes manipulation. Currently, such discussions are absent.

Historical Parallels and the Path Forward

The Early 1980s Reforms: A historical parallel is drawn to the early 1980s, characterized by high inflation and adverse effects on the global population. Reforms initiated by President Jimmy Carter and Chairman Volcker, including the Monetary Control Acts of 1980 and 1981, led to a significant pullback in precious metals and a subsequent period of economic prosperity.
Current Divergence: Unlike the 1980s, current politicians are not advocating for reform but rather for more government intervention, spending, and debt. This suggests that substantial pullbacks in precious metals markets are unlikely in the near future.
Return to a Gold Standard: Thornton expresses hope for a permanent return to a gold standard, with central banks making gold a preeminent reserve asset. The recognition of precious metals' importance by economic superpowers like Russia, China, and the United States, alongside the rise of individual "gold stackers," signifies a fundamental ideological shift.
Last Bull Market Scenario: The current bull market in precious metals could potentially be the last major run before a revaluation or remonetization of gold. This scenario might be accompanied by significant political upheaval and instability.
Cryptocurrency's Role: The emergence of cryptocurrency is seen as an important ingredient in this potential shift, moving money away from state-controlled institutions towards private property with privacy. The "kryptonization" of precious metals is also a key element.
Global Instability: Political instability in leading countries like the US, Europe, and Japan could lead to fragmentation or, conversely, force fundamental reforms to preserve existing systems.
Endgame Revealed: The endgame, characterized by higher prices and economic instability, is becoming apparent. The era of perpetually declining interest rates and stable 2% inflation is ending.
Government Bond Market Signals: A key indicator of progress towards a return to a gold standard will be the unraveling of government bond markets, as seen in Japan and the UK. The Fed's interest rate decisions and their impact on the 10-year government bond yield will be closely watched.

The BRICS Initiative and Western Response

BRICS Settlement Currency: The BRICS nations are exploring a settlement currency partially backed by gold and local fiat currencies, potentially with a "kryptonized" element.
Western Reaction: Thornton hopes this initiative will prompt the US to consider a partially backed government currency, though he is unsure if the US is ready for such a move in the short term.
Market Realignment: Growing pains in the precious metals markets, evidenced by backwardation and shortages, suggest a realignment is underway. This evolution in Western markets, alongside the BRICS initiative, points towards a collision of East and West institutional factors.
Market Control vs. Expansion: Western markets are perceived as controlled and manipulated by a few players, while Eastern markets aim to expand influence and trade.
Collision of Factors: The collision of these evolving institutional factors, including the crypto factor and the desire of countries to move away from US dollar dominance, makes the outcome unpredictable but exciting.

Austrian Economics vs. Keynesian Economics

Keynesianism: State Ideology: Keynesian economics is characterized by government control, intervention, and the promotion of government spending as a solution to economic problems. Interest rate regulation is paramount.
Austrian Economics: Market Process: Austrian economics emphasizes market processes, viewing money as a commodity and private property. Interest rates should be determined by the market.
Seven Deadly Economic Sins: Thornton identifies inflation, the business cycle, and income/wealth inequality as major problems stemming from central bank policies.
Business Cycle Driver: The business cycle is driven by central banks lowering interest rates below market-determined levels, creating unsustainable booms and asset bubbles. Keynesians often misinterpret these as normal conditions.
Skyscraper Curse: Thornton's book, "The Skyscraper Curse," demonstrates how Keynesians have consistently misidentified economic bubbles as normal plateaus over the past century.
Recessions and Inequality: Unsustainable booms engineered by central banks necessitate economic crises and recessions. Furthermore, low interest rates inflate asset prices and benefit the wealthy elite, exacerbating economic inequality.
Politician Preference: Politicians favor Keynesian recommendations because they align with their desire for intervention and spending, while Austrian prescriptions of sound money, balanced budgets, and low taxation are less appealing.
Public Appeal of Austrian Economics: Despite being out of vogue with politicians, Austrian economics resonates with the general public due to its common-sense approach.
Recessionary Conditions: Many populations, including in the US, Europe, and Japan, are already experiencing recessionary conditions, though this has not yet significantly impacted the political class or power elite who benefit from the current system.

The "Genie Out of the Bag" on Inflation

Flexible Average Inflation Targeting (FAIT): The Federal Reserve's reintroduction of FAIT is seen as an admission that the "genie is out of the bag" regarding inflation.
Projection into the Future: This strategy involves projecting future improvements to average out current poor performance, a tactic described as "window dressing" to fend off criticism.
Unconvincing Markets: Thornton believes that markets, particularly government bond and currency markets, and the productive class will not be convinced by such promises of future improvement.
Denial of Contagion: The uniform denial of AI bubbles and economic contagion by Bloomberg guests highlights a concerning disconnect from reality, as the Fed's policies inherently create contagion.

Silver: A Monetary Metal with Industrial Significance

Silver's Monetary Status: Silver is still considered a monetary metal, with over 50% of its consumption for investment purposes (including silverware and jewelry) and the remainder for industrial use.
Historical Reputation: Silver's monetary reputation has diminished in recent decades due to its lagging price performance compared to gold. However, it recently returned to historic high levels of $50 an ounce, seen in 2011 and 1980.
Industrial Demand: Silver has gained industrial significance, particularly in environmentally friendly technologies like solar panels, electric vehicles, and windmills.
Supply Dynamics: A significant portion of silver supply comes as a byproduct of mining other metals like gold, copper, zinc, and lead. Past global infrastructure booms led to increased production of these metals and, consequently, excess silver supply, suppressing its price.
Future Supply Deficit: A future economic crisis could lead to a shutdown of lead and zinc mines, resulting in a deficit of silver supply, even as industrial demand continues to grow. This could lead to significant price increases for silver.
Gold-Silver Ratio: The gold-silver price ratio has decreased from over 100 to below 80, indicating a strong performance of silver relative to gold and increasing attention on the silver market.
Mysterious CME Shutdown: A recent mysterious shutdown of the CME just as silver was nearing a new all-time record high raises questions about potential manipulation.

Manipulation in the Silver Market

Wholesale Market Control: The wholesale silver market is dominated by a small number of banks involved in bringing silver to market and writing futures contracts.
Possibility of Manipulation: This concentration of power opens up possibilities for price manipulation, especially in the short term.
Byproduct Production Impact: While short-term manipulation might occur, the larger factor influencing silver prices is the dynamic of byproduct production.
Asian Influence: The increasing involvement of Asia in mining, refining, and the desire of BRICS nations to move away from dollar denomination will likely reshape the silver market and reduce the potential for Western-centric manipulation.

Platinum: A Precious Metal, Not Strictly Monetary

Smaller Market: Platinum operates in a much smaller market with lower production volumes.
Precious Metal Status: It is undoubtedly a precious metal due to its rarity and value.
Lack of Monetary History: Thornton does not consider platinum a monetary metal in the historical sense, as it has not served as money and is unlikely to do so in a commodity money future.
Investment Potential: Despite not being a monetary metal, platinum's small market size, significant industrial applications, and political instability in producing regions could lead to explosive price movements.
Distinction Between Precious and Monetary: Thornton maintains a distinction between "precious" and "monetary" metals, though both are considered valuable for investment purposes.

Bubbles in AI and Private Equity

AI Bubble: The artificial intelligence sector exhibits classic signs of the Austrian business cycle theory, with companies intermingling sales and borrowings and facing challenges in production. This bubble is becoming more obvious.
Private Equity Bubble: The private equity market is less discussed but equally concerning. The lack of publicly available data and daily price discovery makes it opaque and prone to undetected growth, similar to the mortgage-backed securities and CDOs of the housing bubble.
Coexisting Bubbles: Both the AI and private equity markets are currently experiencing bubble conditions, though they have different characteristics.
Fed's Role: The Federal Reserve's low interest rate policies are creating unsustainable balance sheets and financial obligations across the entire economy, impacting consumers, businesses, and governments.
Contagion Risk: The interconnectedness of these bubbles means that the emergence of a "black swan" event in one area could trigger contagion throughout the entire system.

The End of "Buying the Dip" Mentality

Logical Strategy in Free Markets: Buying the dip is a logical investment strategy in a free market.
Fed's Market Support: In recent years, the Fed has actively supported the stock market, leading to a conditioned response of buying dips.
Fed's Limited Power: However, the Fed's power is not infinite. Despite their interventions, market realizations that the "party has to stop" will eventually occur.
Historical Precedents: Past events like the tech bubble and the housing bubble demonstrate that Fed rate cuts were insufficient to prevent market meltdowns. While COVID-19 provided a temporary bailout, this power is not inexhaustible.
Inevitable End: The current system, built on a complex web of deceit, will eventually come to an end, not necessarily due to a single mistake, but as a reality check for the market.

The Mises Institute and Austrian Economics

Bedrock of Austrian Economics: The Mises Institute is a foundational institution for the study of Austrian economics.
Educational Mission: Its primary goal is to educate students, professors, and the public about Austrian economic principles.
Free Book Offer: The Mises Institute is offering a free book of Friedrich Hayek's greatest hits articles, which cover topics such as inflation, government, and the origins of cryptocurrency. Hayek is credited with laying the ideological groundwork for fighting inflation in the 1970s and influencing figures like Ronald Reagan and Margaret Thatcher.
Call to Action: Viewers are encouraged to leave a comment to receive a link for a free copy of the book.

Disclaimer: The podcast content is for general information only and does not constitute investment advice. Listeners are advised to conduct their own research and consult with a licensed financial advisor.