Why Gold Goes Up Michael Howell Deutsche Goldmesse

TITLE: Why Gold Goes Up | Michael Howell CHANNEL: Deutsche Goldmesse DATE: 2026-05-26 ---TRANSCRIPT--- fact. And what I’m going to try and say in the next um 30 minutes is first of all, the background. We’re living in a world that probably most of you will appreciate is actually quite unstable. We’re living in a very fragile financial system. And I think if you look at some of the data I’m going to show you, which is illustrating the extent to which the US Treasury and the US Federal Reserve are supporting the system, you’d be pretty shocked. Um they are putting a lot of money into the system to keep stability there. And you’re either reassured they’re doing it or you’re worried that the system needs their support. So, you can think of it two ways. I’d be pretty concerned right now. What I’m also going to say is why the can gets kicked down the road. In other words, why debt is continuing to explode. Um this is not just a US issue, it’s a general issue. I am going to focus on the US a bit because the US data is very transparent and you can see the trends that are likely to occur elsewhere. And I’m also going to end up with China because China is the big bogey out there that no one really talks about, but in my view that’s the reason the gold price has been going up a lot recently. It’s not um buying for uh protection against debt monetization in the west. It’s actually active buying in China to protect against debt monetization that is going on there full scale. So, let me um spin through this. I don’t want to you know, get too technical and focus too much on the economics or the structural things, but broadly speaking we’re talking about the international monetary system. And particularly talking about the international monetary system on a Friday afternoon after lunch is going to be a difficult challenge. So, I’m going to spin through this quite quickly. And what I’m really going to say is that you’ve had three very distinct regimes. A monetary dominance regime where central banks are in control, and that pretty much started with Paul Volcker in the US Federal Reserve in the early 1980s. That was a tough central bank squeezing out inflation, not good for gold. The middle regime, fiscal dominance, is what most people talk about. And that is a regime where Treasury departments, finance ministers, in other words, need to sell government debt. Now, we’re kind of in there already, but I’d say we’ve got to a a third degree. There’s another dimension here, which is really critical, which is financial dominance. And that is saying that the financial system is so unstable that governments and central banks have to throw money at it to keep it stable, to keep it running. And the problem is that we live in a debt-driven world, okay? In a direct debt-driven world where the whole credit system rests on debt, you cannot default debt. It’s impossible because the system would essentially implode. So, they’ve got to keep the plates spinning. They need to keep throwing liquidity at it. And that’s the world we’re in now, and that’s the way to think about why gold continues to rise. This chart shows you one of the aggregates that we look at, the main aggregate, which is which is looking at global liquidity. And global liquidity is shown here in relative to a normal money supply measure like M2. We think liquidity is far more important. Liquidity, in our definition, is the flow of money through financial systems, okay? The gold price is a financial price. It is determined by this flow of liquidity. And what you can see here is that it’s remorselessly up from left to right, and it’s going to keep going. And one of the distinctions I want to make, or draw out, is the difference between high street inflation, or what you might call it in the US Main Street inflation, and monetary inflation. Gold is not a good hedge against money Sorry, against High Street inflation. It’s an excellent hedge against monetary inflation. If you want to protect your income, think about High Street inflation. If you want to think about protecting your wealth, think about monetary inflation, because that’s buzzing along in the background at a much faster clip. And the growth rate that I’ve shown in this graph, the black line, is the rate of monetary or liquidity expansion, which is measuring that uh that monetary inflation. That’s been growing recently at a rate of about 10% per annum. That’s the hurdle that you need to think about. That’s the rate that everybody needs to earn on their assets to keep ahead of monetary inflation. Which assets will give you that? Gold, almost certainly. Bitcoin, maybe. And cryptocurrencies, we don’t really know in the long term, but probably. Very high-quality equities with pricing power, and probably um prime residential real estate. Those are the assets that have normally done well, but prime of place is basically gold. In terms of understanding the monetary system, this inverted pyramid is again something I don’t want to dwell on on a Friday afternoon, but suffice it to say that the international monetary system has become a lot more leveraged since the global financial crisis in 2008. And what the system now rests on is collateral and repo markets. You have to understand that the bulk of lending today in the world economy comes through repo, refinancing of uh uh of collateral. Um and that world is dominated Well, that’s the world that dominates the world, and global liquidity really comes out of that. So, what this diagram is basically saying is you have a collateral base, that collateral base is leveraged, and from that you get liquidity, and from expanding liquidity, you get higher gold prices and higher asset prices. Now, the key chart, and again, I don’t want to bore you with diagrams and whatever, it’s much better to look at at active pictures. This is already describing the international monetary system. And this is the monetary system post the GFC, the global financial crisis. And what I’ve put at the center of this is liquidity and debt. And the paradox that we live in in the world economy is that liquidity needs debt, and debt needs liquidity. There is a vicious or virtuous, depending on which way you like it, circle, which drives both up together. And the reason for saying that is that if you think about debt, and you think about global financial markets, something like 80% of all primary transactions in financial markets today are debt refinancing transactions. They are not raising new capital for new investment projects. That’s what the textbooks tell us they do, but the world has moved on. We’re in a very, very different space. We’re in a world of debt refinancing. So, something like four in every five transactions in world financial markets are debt refinancing transactions. Debt has to be rolled over, and that’s what many investors forget. If you take out a five-year bond, in five years time you’ve got to replenish it, you’ve got to roll it over. Default it, and spoiler alert, these things never get defaulted, or roll it over. Now, debt needs liquidity for that refinancing, but liquidity needs debt, because liquidity, as I said, is based on repo now. And as the top left-hand comment says, 77% of global lending is now collateral based, and that’s a World Bank figure, not ours. It comes from the World Bank, so it’s an official figure. 77% of all lending worldwide is now rests on collateral. And a lot of that collateral is things like government debt. Okay, that’s the collateral that people tend to post in financial markets. If things derail, and you start to get a problem, then you’ll get a financial crisis. You need an equilibrium between debt and liquidity. They both move together. If you don’t get that, the left-hand side says you can get a derailment, and you get problems, and therefore you’ve got to watch key indicators. Look at things like the MOVE index, the index of Treasury market volatility in the US, or look at the new replacement for LIBOR, the SOFR. The SOFR rate, particularly the spread against Fed funds rates. Those will tell you whether the system is derailing or not. Is debt increasing? It’s going exponential. And the reason for that is largely because of aging populations. Governments have got welfare commitments that nobody is brave enough to say no to. So, effectively, what we’re looking at is increasing levels of debt, and that’s both private debt and public debt. And what we’ll see in a few moments when I turn to the US are the drivers behind that. But just before we get there, let me just show you this chart. And this chart is the debt-to-liquidity equilibrium that we’ve basically seen since 1980. Now, the reason for citing this chart is that what I’ve illustrated by annotation of the top is when you get problems in financial markets. Each one of those peaks in the debt-liquidity ratio is a financial crisis. Why do you get a financial crisis when you get a high debt to liquidity ratio. The reason being is it’s very difficult to refinance debt. You cannot refinance debt if there’s not enough liquidity to do it. Liquidity represents balance sheet capacity that will enable you to roll the debt over. If it’s not there, you get tensions in financial markets and you get a cascade and a financial crisis. What happens on the other side if you get too much liquidity? If you get too much liquidity, the vent is asset market bubbles. And look at that chart. Whenever you get a big drop in that debt liquidity ratio, what you find is you get an asset market bubble. What we’ve just been through that I’ve labeled here is the everything bubble. We’ve had so much liquidity and so little debt taken out um that there’s this excess liquidity. But as you’ll see, the projection says that we’re moving up northwards quite rapidly over the next few years. And part of the reason for that is that central banks are saying that they’re going to sit on their hands and not create very much liquidity. Um you know, seeing is believing, of course. And the other thing is that there’s a lot of debt coming back into the system that was refinanced during the COVID years. Now, I used to work at Salomon Brothers, the US investment bank, and we were schooled in a book which was called The History of Interest Rates by uh by Sidney Homer, which looked at 5,000 years of interest rate history. Nowhere in those pages was there any reference to the zero interest rates. They never happened in 5,000 years. But we had during the COVID years not just zero interest rates, we had negative interest rates. So that’s how crazy the central bankers were. And because of that, of course, it encouraged more people to take out debt and what’s more, encouraged people to term out their debt. So there was a lot of terming out of debt into the later years of this decade, ‘26, ‘27, ‘28, ‘29, and that’s coming back into the system to re- be refinanced. So, there’ll be tensions. Now, how do they manage those tensions? This is one of the key ways to think about it, and that is that the US Treasury is basically managing stability in the bond markets. Now, one of the things that we say to our clients is, it’s no longer really useful to look at Fed funds interest rates. I mean, they’re really meaningless anyway. Um but, there’s whole pantomime that the Federal Reserve creates around setting of Fed funds rates, but that’s not really the important variable. The important variable is basically looking at something called the MOVE Index, which is a measure of volatility in the bond markets. Now, why is that so important? It’s so important for two reasons. One is that hedge funds have moved to become big buyers of US Treasuries. They’re doing something called a basis trade, which means they’re buying cash Treasuries, and they’re shorting the futures market. If they’re doing that trade, they need low volatility. As soon as volatility spikes, they’ll close it because they’re very heavily leveraged. And that’s why the Treasury needs a a low MOVE Index. The second reason is that the whole system of liquidity creation is based around repo, and the repo multiplier depends on low volatility. If you get low volatility, you get a big repo multiplier. Uh if you get high volatility, that will contract very sharply, and there’ll be a liquidity crunch. And they’re doing that by two things. One is issuing a lot of bills at the front end of the uh of the maturity structure, so three-month bills, um six-month bills, etc., rather than longer-dated Treasuries. And the other thing they’re doing is they’re doing what’s called Treasury buybacks. So, they’re buying back a lot of stale debt, which is illiquid. And the scale of them doing that is phenomenal. This is looking at the MOVE Index, which is the index of volatility uh on the US Treasury market. And the thing to focus on is the recent spike and how quickly that recent spike dropped, okay? That was a sort of you know, end-of-life experience almost for the for the bond markets. When I was in the bond market, it used to be the case that anything over 150 on that index, on that MOVE Index, which relates to about 15% volatility across the curve, was sort of a life-ending event. I mean, you’d pretty much think the bond markets were toast after 15%. We did get a higher in the past, but up to 200 at one stage during COVID, but basically, that’s the range you see. We’re just about back into that normal zone now, which is about around 70 or 7% volatility. And that’s what the Treasury is trying to do. How are they doing that? They’re doing it this way. They’re doing it through Treasury buybacks. And what the data is showing is the MOVE Index again against those red bars, which are showing active Treasury buybacks. And basically, what the conclusion is is that every 10 points that the MOVE Index jumps, the Treasury launches a buyback of about 30 to 40 billion dollars. So, they’re actively trying to keep volatility down. That’s how shaky the system is. The second thing is is what is the Federal Reserve doing? And the Federal Reserve is basically tweaking the system. Don’t believe the story that they finished QE because they’re doing QE. And what the black line on that chart is showing is something called the SOFR spread. It’s shown inverted, and if that black line is very low, it’s saying there’s big tensions in the repo markets. And the orange line is banks’ reserves, or actually the excess level of banks’ reserves. Now, what happened at the end of last year was a big spike in the repo markets. A a one. So much so that the the Federal Reserve had to introduce a new QE measure, which they denied was QE, called reserve management purchases. And they’ve been pumping liquidity into the system uh through that means. On top of that, they changed the rules for banks, uh changing the um supplementary liquidity ratio of the banks. And together, those two moves have added $600 billion to US money markets. And you can see that by looking at the difference between the lower point of that orange line and the peak uh about two or three weeks ago. And this is weekly data, as you can see. And what it shows is a big injection of liquidity into the markets. Now, the question to ask is, are you happy taking risk with the knowledge that markets have been inflated by Treasury buybacks over recent uh weeks and by $600 billion of injections by the Federal Reserve and the Treasury combined? I would be kind of skeptical. And this chart is just showing the scale to which the repo market spiked, um which is um well, I can’t see there, but you can see the spikes uh at the end of last year. This is daily data, and what’s happened since. So, they managed to calm the storms. So, what’s happening here is they’re pedaling fast or running fast just to stand still. There’s a lot of activity going on. What happens if they get it wrong? This is Japan. This is showing the dotted line is showing where um the Japanese JGB yield should be on a sort of fair value basis, and the solid line is where they actually ended up. So, the Japanese was doing a lot of yield curve manipulation, and they were pushing yields down by various means, yield curve control, quantitative easing measures, and whatever. As soon as they started to or they stopped that, yields spiked up. And that’s the real threat that you’ve got in the in the markets. Now, let me turn on to the problems in the US. This is looking at why debt goes up. So, we’ve had the evidence of why there’s a problem. Is it going to get better or is it going to get worse? It’s going to get worse. Uh and this is why you’ve got to have gold as protection. This is showing government outlays lays and revenues. The interesting point about the US, which I wish were true in Europe, is that revenues of the US government are pretty stable. Tax revenues are flat. Okay, there’s no big hikes in taxes. That is the the US authorities just can’t push that through. It’s not part of the policy agenda. Unfortunately, in Europe it is, and in Europe’s case, that orange arm will be shifting up. But, and the other thing is that in all areas, the red line, outlays, is going up. And this is like the widening jaws of the crocodile. Uh it’s getting a bigger and bigger gap. So, in other words, they’re going to have to turn to the markets more and more funding. Um and that’s the risk. This is the structural [clears throat] deficit of the structural fiscal deficit of the US economy. And this is data that comes from the Congressional Budget Office in the US. So, this is a bipartisan body. Um and what they’re saying is you’ve got a structural deficit fiscal deficit in the US of circa between 8 to 10% of GDP. That is a whopping great figure, and you can see that history and what this means. So, how on earth does the US fund itself going forward, but more particularly, how do governments fund themselves? Cuz it’s not just a US problem. Just the US happens to have the data uh there. The black line, the dotted line, is looking at the debt-to-GDP ratio. Okay? Now, over that period of increasing debt, which were the best-performing asset classes? This is showing 2000, 2010, and 2026. And it’s looking at the increase in prices. Very broadly, since year 2000, the value of federal debt has gone up 10 times. The value of the S&P 500 has gone up six times. The value of gold has gone up 12 times. So, gold is a very, very good hedge against that monetary inflationary process. The middle lines in that chart are showing what I call the monetary inflation factors. Things like federal debt, overall government debt, central bank money. All these elements are showing the rise in monetary inflation. Look at consumer price inflation at the bottom, the CPI. That’s hardly moved. But everybody focuses on that and misses the big picture. The big picture is monetary inflation. It’s basically destroying the value of paper money, which is going on beneath the surface. No one’s really responding to that. Now, is gold a good hedge? We said yes. This is the value of federal debt in gold terms since the middle 1940s. So, you can see this is broadly stable. In other words, gold keeps pace with the rise in federal debt. And federal debt is the big driver of liquidity. So, this is the root to why the gold price goes up. And you can see there that, you know, whatever it was in uh in 1945 or there or thereabouts, uh you got uh the value of federal debt was 6 billion oz. Um again, in uh 1970, it was 6 billion oz. Uh again, in in 2000, uh it was about 6 billion oz, and there it is again. So, gold has been a remarkably good hedge against the profits of of governments. Now, if you extrapolate this, which is really the conclusion I’m coming to, is the black dotty line is the debt to GDP ratio of the US and the projection is shown there and that projection aligns with what the Congressional Budget Office was doing or is is saying. If we keep the real value of federal debt and gold as it as it was on that previous chart constant, what is it that the gold price going forward given the accumulation of federal debt? So, in other words, you keep the real value of federal debt constant by letting the gold price to go up. And that’s what that exponential curve is showing. The The actual history before the gray area is the actual history of gold and what happens is that the exponential rise is what happens to the gold price if if we get that. You might say that can’t happen. Okay, well, then what has to change? What has to change is that governments have to find another way of funding themselves. That could be higher taxation. Don’t know if that’s going to work. It could be reduced expenditure. Well, given the fact that most of these programs are mandatory, how’s that going to work? So, it’s really, really difficult. So, that’s the driver from the US or the western side. But, I want to finish on what’s happening internationally because I think this is an equally big story that we need to understand. And this is looking at the shape of the international monetary system. And again, I apologize for doing this on Friday after lunch, but this is the how the international monetary system is changing and why this is important to understand. The old world monetary system is shown at the top of that diagram. And what that’s basically saying is that you had effectively the US dollar, which had as collateral gold and US Treasuries. So, every monetary system needs collateral. That’s the key point, okay? And the collateral for the old world monetary system was gold and treasuries, and it became less gold and more treasuries after the end of Bretton Woods. Um and what did other countries do? Other units basically used as collateral foreign exchange reserves. So, if you had lots of foreign exchange reserves, your currency was strong. If you didn’t have foreign exchange reserves, it was weak, okay? Now, if you look at the new world monetary order, I’ve looked at three possibilities. The US dollar, the Chinese yuan, and the euro. And I’ve said, “What’s the collateral in each of those systems?” Well, if you look at the US dollar system, it’s treasuries, and it may well be stablecoin. I think stablecoin is going to be a huge boon to the US, and I think it’s a game-changer in many cases, because it undermines the integrity of a lot of other financial systems worldwide. Uh if you’re in Turkey or if you’re in Africa, and maybe even if you’re in the euro area, what’s not to like about US stablecoin? Uh and that’s the risk that um many of these countries have, because they will lose control of their monetary system. What’s driving um that collateral? It’s federal debt demographics, all [clears throat] these factors that we went into. So, let’s think about China. What’s the collateral for the for the Chinese yuan? Well, it can’t be the Chinese government bond market, because no one understands the Chinese government bond market if you’re international. You don’t It hasn’t got an international presence, okay? So, you can’t rely on Chinese government bonds as your collateral for the yuan. The only thing you could possibly rely on is gold. And that’s what China is doing. It’s accumulating gold. It’s reinventing the Bretton Woods system. And although people say, “Well, of course, nobody will ever get hold of the Chinese gold.” Well, that’s true, but that was true under the the Woods system. America didn’t let anyone have his gold. I couldn’t go and get the gold. If you’re a a friendly government, you could try your best, as the French did, to try and get gold, but the Ameri- Americans closed the gold window pretty horridly. So, China’s in the same boat. It will allow piecemeal transactions in gold, uh but it will basically stop people taking money uh uh gold out. So, you might do a few token gold uh oil exchanges, but that’s it. So, effectively, they’re accumulating gold. What about the Euro system? This is not uh a brick talking, but I I just don’t know. Um I think there’s a real question. I would argue it was the German Bund. That was the mainstay, the collateral in the Euro system, but I’m not sure what it is going forward, because there’s talk about Eurobonds and whatever else, and fiscal discipline is clearly going to be lost. So, that’s really a challenge. So, let’s just focus for a moment on China in these last few slides. The key point to understand about China is they’ve got capital controls, okay? That gives them huge flexibility. What China also has is a huge insurmountable debt problem. If you think the US or Europe has debt problems, China’s got a bigger debt problem. China is experiencing debt deflation right now, which is why the economy is struggling, uh why there’s not Well, there’s there’s no inflation. There’s occasionally deflation in China. And what they’re doing is they’re deliberately devaluing the yuan internally. They’re stopping the Chinese getting their money out with capital controls. You can’t buy crypto. That’s illegal in China. You can buy gold, but you clearly can’t export it. So, what are Chinese residents doing? They’re buying gold with alacrity. They’re buying lots of gold, because the Chinese are injecting lots of money domestically, the PBOC, to try and devalue the yuan, because if they devalue the yuan, they basically dig themselves out of their debt problem. That’s the only way governments get out or countries get out of debt. They devalue the debt. They print money. They create domestic inflation. That’s what China’s doing. There’s no secret to that there. That’s what is happening. And that’s why Chinese residents are buying gold. But at the same time, they want to challenge the US dollar. So, they’re trying to establish the yuan as an international currency, and they’re backing it with gold. So, you’ve got two big buyers coming through now of gold in China. You’ve got the domestic private sector, and you’ve got the government. And the Shanghai exchange is now driving the gold price internationally, no longer Comex, no longer London. It’s the Shanghai Gold Exchange, which is in the driving seat. And what you can see there is an accumulation uh by the government and the accumulation by the private sector. First of all, let’s look at what’s happening in terms of government. This is gold holdings of the BRICS and friends versus the US. The horizontal line is gold in Fort Knox, 8,000 tons a little bit, right? We assume. But let’s let’s say that’s correct. The orange line is the BRICS and friends, and that’s overtaken US holdings. Focus on the Chinese number, the black line at the bottom. Do you believe it? I don’t. I think it’s a lot lot higher than that. For the simple reason, why would it lag what’s happening in the other BRICS? Surely it would be rising even faster. My view would be China has well over 6,000 tons now uh officially of gold, and it’s challenging fast. And that’s been a big source of demand for gold. The last chart, cuz I’m now on my last minutes, I think, is this one. And this is basically looking at what has been driving the gold price. The orange line is the price of gold in you in Chinese yuan on the right hand scale. And given the fact that the yuan US dollar is more or less fixed, take that as a dollar gold price. And the black line is PBOC liquidity injections into the system. Now, what has driven the gold price over the last few years? Is it um liquidity in the US, Europe, or China? I think China has a big big role in this, and I think that goes on because China has a lot of debt to devalue and a lot of gold to buy. And that’s why the gold price is going to go up, not just for the reasons of US uh and US fiscal irresponsibility and European fiscal responsibility. It’s all to do with the fact that uh China is in a more desperate situation. Thank you.

[applause] Before you leave, we’d like to Thank you very much. give you a gift. That was a great presentation. Thank you, Mike.