Luke Gromen: Rising Rates are No Longer Bad for Gold

Tom welcomes back Luke Gromen of Forest for the Trees back to the show. Luke discusses the relationship between gold and real rates in the context of a capital crunch. Luke suggests that gold is being re-introduced as a reserve asset due to Russian sanctions and that energy prices need to rise to drive production growth. However, Western borrowers are too heavily indebted to pay their debts, leading to a potential capital crunch. If the US fails to meet its liquidity needs, it will lead to a significant spike in the dollar and a decline in risk assets. Alternatively, if the US Fed provides enough liquidity, it could cause inflation which is bad for bonds but good for gold and stocks. Luke advises investors to remain unlevered and warns that the US Fed may need to back off before the election, as inflation has been absent for a long time. He suggests shorting long-term US, UK, and Western sovereign debt as term premiums are still negative and yields remain inaccessible. He pins this to the US government's need to pull forward its debt issues and the debt ceilings. Luke further discusses the concept of fiscal dominance and believes that the Fed will soon have to initiate QE to finance government deficits, leading to yield curve control. Finally, Luke discusses the de-dollarization of commodity markets and the need for oil prices to rise by 5-8% year to year. He commends the Biden administration’s decision to purchase oil to fill the SPR and underscores the importance of OPEC in stabilizing the market. Luke stresses that traders must think and plan for the long-term implications of their decisions in order to prevent disaster. Time Stamp References:0:00 - Introduction0:45 - Gold and Rates?3:17 - Emerging Markets6:20 - A Capital Crunch8:55 - Fed Policy & Elections12:24 - Rates & Treasuries17:43 - Fiscal Dominance22:20 - Inflation Targeting28:57 - Yield Curve Control30:30 - Japan & U.S. Influence37:02 - Rates & Debt Servicing38:53 - Banking Sector Health45:45 - The Dollar & BRICS52:08 - IMF & Oil Trade53:50 - Energy Supply & CapEx56:44 - Peak Cheap Energy?1:01:03 - SPR & Treasuries1:04:24 - OPEC & U.S. Relations1:11:25 - Wrap Up Talking Points From This Episode * Gold is being pulled back into the system as a reserve asset amid Russian sanctions. Energy prices need to rise to drive production growth.* The Fed may need to cut back before the election and it could remain unclear what their plan is for the fiscal system.* OPEC is carefully considering the second and third order implications of its actions in order to prevent the global economy from experiencing drastic price fluctuations. Guest Links:Twitter: https://twitter.com/lukegromenWebsite: https://fftt-llc.com/ Luke Gromen began his career in the mid-1990s in Research at Midwest Research before moving over to institutional equity sales and becoming a partner. While in sales, Luke was a founding editor of Midwest's widely-read weekly summary ("Heard in the Midwest") for the firm's clients. He aggregated and combined proprietary research from Midwest with inputs from other sources. In 2006, Luke left FTN Midwest to become a founding partner of Cleveland Research Company. At CRC, Luke continued to work in sales and edit CRC's flagship weekly research summary piece ("Straight from the Source") for the firm's customers. In 2014, Luke left Cleveland Research to found FFTT, LLC ("Forest for the Trees"), a macro/thematic research firm catering to institutions and individuals that aggregates a wide variety of macroeconomic, thematic, and sector trends in an unconventional manner to identify investable developing economic b...