Global Debt At Tipping Point: Gold, Silver Rally ‘Just Starting’ | Matthew Piepenburg

Key Concepts

• Dollar Debasement: The erosion of the US dollar's purchasing power due to increased money supply and monetization of debt.
• Sound Money: Currency that is backed by a tangible asset like gold, maintaining its value over time.
• Fiat Currency: Government-issued currency not backed by a physical commodity, its value determined by supply and demand and government decree.
• Debt Crisis: A situation where a government or entity cannot repay its debts, leading to economic instability.
• Credit Cycles: The recurring pattern of expansion and contraction in the availability of credit.
• Unsound Money: Currency that is not backed by a tangible asset and is prone to inflation and devaluation.
• Secular Rise (of Gold): A long-term, sustained upward trend in the price of gold.
• DXY (US Dollar Currency Index): A measure of the value of the US dollar relative to a basket of foreign currencies.
• Milkshake Theory: The idea that the US dollar, as the world's reserve currency, attracts capital from other countries, even when it's being debased.
• Triffin's Law: The dilemma faced by a reserve currency issuer, where its role in global trade leads to a trade deficit.
• Petrodollar: The practice of pricing oil in US dollars, increasing global demand for the currency.
• BRICS: An acronym for an association of five major emerging national economies: Brazil, Russia, India, China, and South Africa.
• De-dollarization: The process of reducing reliance on the US dollar in international trade and finance.
• Constructive Default: A situation where a government indirectly defaults on its debt by issuing debt with negative real yields.
• Financial Repression: Government policies that artificially lower borrowing costs for the government, often at the expense of savers.
• Commodity Super Cycle: A prolonged period of rising commodity prices driven by strong demand and limited supply.
• "Everything Bubble": A term used to describe a market where all asset classes appear overvalued.
• Buffett Indicator: A valuation metric that compares the total market capitalization of a country's stock market to its GDP.
• Private Credit: Loans made by non-bank financial institutions to companies.
• Payment in Kind (PIK): A type of debt where interest payments are made in the form of additional debt or equity rather than cash.
• Gold-Silver Ratio: The ratio of the price of gold to the price of silver, indicating their relative valuations.
• Cup and Handle Pattern: A bullish technical chart pattern in financial markets.

Summary

This discussion features Matthew Piepenburg, a partner at Von Greers AG, who elaborates on the current state of global markets, with a particular focus on precious metals and the US dollar. He argues that the US is facing a significant debt crisis and that the dollar is undergoing debasement, leading to a secular rise in gold and silver prices.

The Dollar's Decline and Gold's Rise

Piepenburg asserts that the US dollar is being debased to monetize unsustainable debt. This debasement is driven by the expansion of the M2 money supply and central bank money printing. Despite the dollar's role as the world reserve currency and the "milkshake theory" that attracts global capital, its purchasing power is diminishing. This is evidenced by historical devaluations in 1933 and 1971, and more recently by the Plaza Accords.

Several factors indicate the dollar's weakening position:

• BRICS De-dollarization: Emerging economies are actively seeking to reduce their reliance on the US dollar.
• Central Bank Gold Stacking: Since 2014, central banks have been net buyers of gold and net sellers of US Treasuries, with central banks now holding more gold than US Treasuries for the first time since 1996.
• Petrodollar Erosion: The petrodollar system is losing its dominance.
• BIS and IMF Actions: The Bank for International Settlements (BIS) classifying gold as Tier 1 capital and the International Monetary Fund (IMF) discussing gold in 2021 further signal a shift.
• Morgan Stanley's Allocation: A significant shift in allocation recommendations from major financial institutions like Morgan Stanley, suggesting a higher percentage of gold in portfolios.

Piepenburg emphasizes that gold's rise is not a speculative "gold bug" phenomenon but a historical confirmation of currency debasement to monetize debt. He believes gold will continue its secular rise as long as fiat currency debasement persists and sound money does not return to major economies.

The US Debt Crisis and its Implications

The conversation highlights the severity of the US debt crisis, with the national debt exceeding $37.8 trillion and interest payments surpassing $1.2 trillion. David Kelly, Chief Global Strategist at JP Morgan, warns that America is "going broke slowly." The debt-to-GDP ratio, already at 99.9% (and over 120% by Piepenburg's calculation), is projected to reach 143% by the end of the decade, mathematically slowing growth.

Piepenburg argues that politicians are reluctant to address this crisis by cutting entitlements or defense spending. The only viable option, he suggests, is to "inflate it away" through currency debasement and financial repression, where real yields on government debt are negative.

The impact on the average citizen is significant:

• Decreased Purchasing Power: Wages are not keeping pace with inflation, leading to a decline in real purchasing power.
• Recessionary Indicators: Numerous economic indicators, including revised nonfarm payrolls, delinquency rates, corporate profit margins, and planned hiring, suggest a recessionary environment despite official pronouncements.
• "Main Street" Suffering: The everyday person feels the pinch of inflation and the weakening dollar, even if official inflation numbers are downplayed.

Geopolitical Shifts and the Multipolar World

The weakening of the US dollar and its diminishing hegemony are contributing to a significant shift in the global geopolitical balance. The rise of the BRICS coalition, the repatriation of gold by 30 countries, and 45 countries trading outside the US dollar all point towards a multipolar world.

Piepenburg cites the warning from Vilhem Middle, author of "The Big Reset," who foresaw this breakdown of the old system and the world reserve currency. Middle's observation of increasing conflict rather than cooperation between nations is a cause for concern, potentially leading to war as a distraction from domestic issues.

The analogy of China playing chess while the US and G7 play checkers highlights the strategic advantage China holds due to its manufacturing prowess and growing influence within coalitions like BRICS. The US, once a creditor nation, is now the world's largest debtor with a currency that is no longer fully trusted.

Proposed Solutions and the Unlikelihood of a Gold Standard

Piepenburg outlines a five-year plan for the US, emphasizing honesty, austerity, and constructive destruction. Key priorities would include:

• Honesty about the Debt Crisis: Acknowledging the severity of the debt and the role of internal spending, not external blame.
• Austerity and Spending Cuts: Reducing entitlements and military spending.
• Bringing Down Debt and Raising GDP: This would involve reshoring jobs and incentivizing companies to manufacture in the US.
• Constructive Destruction: Allowing markets to mean revert to fair valuations and experiencing a real recession to foster discipline.

He expresses skepticism about politicians implementing these measures due to the desire to stay elected.

Regarding sound money, Piepenburg believes a return to a gold standard is unlikely. While it would force fiscal discipline, sovereign nations, including China, are not yet ready for such a constraint. He notes the lack of transparency regarding US gold reserves and the potential for other nations to hold more gold.

The Case for Silver

Silver is presented as a compelling investment, often referred to as "smart man's silver." While an ounce of gold may be out of reach for many, silver remains more accessible. Piepenburg highlights that silver rewards infrequently but extravagantly, and its current rally is a sign of the broader gold bull market.

Key arguments for silver include:

• Massively Undervalued: Silver is significantly undervalued compared to gold, with a high gold-silver ratio.
• Supply Deficits: The silver market faces clear supply deficits.
• Breaking Manipulation: The ability to manipulate silver prices on COMEX and LBMA markets is diminishing due to dwindling available ounces.
• Technical Strength: Silver exhibits a 45-year cup and handle pattern, indicating potential for significant upside.
• Accessibility for Retail Investors: Silver offers an entry point for retail investors who cannot afford gold.

Market Valuations and the "Everything Bubble"

Piepenburg acknowledges concerns about an "everything bubble," where all asset classes appear overvalued. He draws parallels to historical market tops like 1929, 2000, and 2007, noting that high multiples often precede difficult times.

He identifies several areas of concern:

• Overvalued Tech Stocks: The S&P 500 is heavily concentrated in a few tech names, creating systemic risk.
• Subprime Market: A significant portion of Americans are in a subprime category, with rising bankruptcies and defaults.
• Private Credit Bubble: The private credit market, including PE and venture capital, is opaque and faces risks, with some borrowers unable to make interest payments.
• AI Bubble: The rapid growth and complex financing structures in the AI sector also present bubble risks.

While acknowledging that markets can continue to rise, Piepenburg warns against basing retirement plans on the current S&P 500 valuation.

Gold vs. Other Assets

Piepenburg clarifies that gold, unlike dividend-paying stocks, is a "yieldless" asset. However, he argues that many traditional "yield-generating" assets, such as US Treasuries and even some corporate bonds, are not beating actual inflation, resulting in negative real yields. Therefore, gold's lack of yield is not a unique drawback in the current economic environment.

He concludes that gold is not just another commodity bubble but a fundamental part of a seismic shift in the global monetary system, serving as a strategic reserve asset for central banks. He advises retail investors to follow the lead of central banks in their allocation to gold.

Conclusion

The discussion paints a picture of a global economy grappling with a severe US debt crisis, currency debasement, and a shifting geopolitical landscape. Gold and silver are presented as essential hedges against these systemic risks, with gold poised for a continued secular rise and silver offering a more accessible entry point for investors. The conversation underscores the importance of understanding historical economic cycles and the fundamental role of sound money in preserving wealth.