To the gold owners. And when they decide we’re pulling back and saying no mas, then it’s over. And the price of everything else in dollar terms will, will go to infinity because that’s how people. So it’s asymmetrical. The dollar is bidding on gold. It’s gold not bidding on the dollar anymore. This is going to happen. They’re going to have to start expanding their balance sheet again. The question is how much are they going to print? Is that going to be the end of the dollar? I would assume that you say no, there’s going to be a few more rounds of this, a few more years.

And I’m saying maybe it will be the end. I mean we’ll see. It’s. We’re gonna have a test case pretty soon, I think in the next couple of months. Hey guys, Raf here from the endgame investor and I got Keith Wiener on the line of monetary metals of which I am a client. So we’ll be talking about that a little bit why I’m a client and how Keith is able to offer interest on gold deposits at his, I would say one of the only real banks in the world, if not the only real bank in the world that takes gold deposits and loans them out on interest to jewelry companies mainly.

That’s how a bank is supposed to work. That’s what they’re supposed to do. But we’ll talk about that in a few minutes. The first thing I wanted to ask you, Keith, is I heard an interview that you had with Tom Bodovic of Palisades Gold Radio. Maybe it was a week or two ago and you were saying something that I think we’ve talked about before that there’s, there’s going to be an end to this whole thing. One day the dollar is just going to collapse and hopefully we’ll have enough monetary wisdom in place to prevent society from collapsing.

But I guess we’ll see what happens when it happens. Now I have, I have this running theory that I write about in on the End Game Investor on Substack that what could cause the end to this system. And I wanted to run it by and see what you think. So first we have here is the amount of, of reserves, bank reserves that are in the system. This is as of Wednesday. So this is, it’s. What day is it? It’s now Thursday. So we’ll have a. We’ll have the new numbers today at around 4:30 Eastern. But this is the latest numbers that we have for last week.

So we have 3. $3.2089, 1 $5 trillion. That’s all the dead zombie debt since 2008 that could never be paid off. So the Fed had to buy it all. Basically now it’s just reserves in the basement. And we have over here, these numbers just came out seven minutes ago. Seven minutes. See, not until four minutes is it really coming. And as your water broken, even the volume in this tab of the secured overnight financing. Secured overnight financing rate volume of the repo volume. How much money is trading hands between Treasuries and cash every night between banks? So we hit a new record high of $2.83 trillion.

The reason it’s record high is because it’s the end of month. So repo volume spikes for whatever reason at the end of the month. Doesn’t really matter why, it’s just happening. So what my theory is is I looked at the ratio, assuming that bank reserves are what is fueling this. That’s where the repo volume comes from. Like where, what is this $2.8 trillion changing hands every night. And it comes from bank reserves. If I’m not mistaken, if I am mistaken, that would be embarrassing. But you can tell me if you think I’m mistaken on that. So I looked at the ratio of repo volume to reserves going back as far as they have the data and I looked at when the last repocalypse was in September 2019, when the overnight repo rates went to 10%.

And then at that after that, then the Fed had to start QE again. They had to start buying more bonds. The biggest plumbing pipe in the monetary system was clogged and they couldn’t get the interest rates down. They had to expand their balance sheet. So that was 83% on September 17, 2019. That was when the repo rates went to 10% at 83% repos to reserves ratio. Now we’re, as of today, we’re above that, we’re at 88. And my theory is that if we, if we are sustained above 83, 84, 85, I don’t have an exact number, but somewhere in that, in that ballpark, if we’re sustained in that area for long enough, there’s going to be a repo crisis.

And when there is a repo crisis, just like last time, the Fed had to print, what was it, two, three, four trillion dollars coming out of COVID which was right juxtaposed to the, to the apocalypse. And you can have your theory as to whether that juxtaposition is on purpose or whether Covid was just an excuse to print trillions of dollars or whether it was a genuine emergency in their eyes. And I don’t, I don’t know one way or another, and I don’t know if you do either, but we all have our thoughts about it. Is there, what are the flaws in that theory? Because after, after that ratio hits, you know, around where it is now, and then the Fed has to print 2, 3, 4 trillion dollars as it did last time, you know, the, the money supply or the, the Fed’s balance sheet, wherever you want to look at, even more vertical than it is now.

It’s an interesting theory. So you’re getting my completely off the cuff response. I hadn’t really considered, you know, looking at that as a ratio and thinking about that. So here it goes. Obviously for the repo volume, or I guess what you’re, when you say volume, you don’t mean necessarily daily change, but rather total repo balance. The system, in order for that to go up, you have to have simultaneously two things, which is available reserves. I think you’re right that in order for bank A to lend on a repo basis to Bank B, bank A has to have excess reserves.

And so there have to be available reserves, at least on the part of some banks. And then at the same time there has to be a demand for reserves on the other side. Because you pay for repo, you’re not going to do it if you don’t need it. You’re doing it either for window dressing at the end of the quarter, which I think is your point. Every bank wants to make its ratios look a certain way optically. And so at the end of the quarter you’ve got all kinds of repositioning trades and repo and all that.

You know, as part of that you have to have the demand and you have to have supply. Now at this point and for years, the banking system isn’t really reserve constrained. You know, first of all, they, they changed the rules. It used to be you had to have a certain ratio of reserves to deposits. And basically that, basically that is now by statute zero or by dictator, however they change these things. It’s not, it’s not Congress passing a law anyways. It’s either central bank just dictating it or by whatever process, you know, they said zero. And then secondly, you know, banks aren’t really constrained by what they have as reserves anyway.

There are various factors limiting what they do, you know, balance sheet risk, you know, being obviously one of them. And so, you know, banks can get into a situation where they, they don’t feel comfortable lending anymore because they feel they’re going to need it themselves, you know, for whatever purpose. Right. So if, if I’m, if I’m a customer at bank A, you’re a customer bank B, I buy something from you and I write a check that ultimately is going to result, not necessarily instantly. I mean, the banks may hold a balance, you know, with each other institutions up to some limit, but eventually that’s going to involve a transfer of, you know, reserves from bank A to bank B.

And if you’re bank A and you’re watching reserves, you know, you got to be mindful of that. I mean, that’s an oversimplification. But so the question is, if the ratio of repo demanded to repo, you know, hypothetically available or adjustable repo market or whatever you want to call that is rising, then what does that mean? That means, yeah, the reserves are there on the hands of some banks, but there’s a lot of banks that demand it. And it would be interesting to see if that correlated with repo rate, let’s say minus Fed funds rate and see if that was increasing notes of repos becoming more expensive as the ratio goes up.

That’s what I would, that would be my hypothesis that I would want tests on that. And so why are banks so hungry for repo that it’s increasing? Well, there’s a balance sheet problem of some sort or another. And so that balance sheet problem could have a high correlation with, I mean if that happens across the whole banking system, that could have a high correlation with the next panic or the next crisis, whatever you want to call it. What would the Fed have to do to combat the next apocalypse? They’d have to print a lot of money like they did before.

Right. So obviously one thing the Fed likes to do is put in more reserves, which basically means buying bonds off the banks. And as you pointed out, the banks love them to buy, you know, bad bonds, bonds that are garbage, you know, because the bank has, has to deal with that impairment, you know, somehow on its books. And the Fed can park it away, as you put it in the basement and, you know, conceal it out of sight. The Fed doesn’t like to do that any more than it has to for a lot of reasons. So that’s one thing they can do, is basically just increase reserves.

They can buy assets with an intention to cause the interest rate to tick down and they can pick where on the yield curve they buy those assets depending on where the Crisis is. At 100,000 foot level, you can just say the treasury market. But when you zoom down below 1,000ft, you start to say we’re talking long end, mid end, short end, what they call bills, notes or bonds, like where’s the stress? One thing that I’m still upset about is there used to be something called Libor, the London interbank offered rate, which was an unsecured funding rate.

And like a lot of other things in our system, they like whenever they see a bit of signal that’s saying things they don’t want it to say, they suppress the signal. It’s kind of like if you have an old fashioned fuse box in the basement and you know, just while you’re cooking, you know, with an electric oven, your wife is, you know, watching on a big screen TV and your daughter’s drying her hair with a hair dryer and it, and it burns out the fuse. So you go down, you put another fuse in and then that burns out and you go down and you don’t have another, another fuse.

So you put in a copper slug and suppress the signal that you’re overloading the circuit. And that works until the house catches on fire. And that’s a self correcting, smart people don’t do that for that reason. So Libor being unsecured is a measure of stress in the banking system. How much bank A has to pay bank B to borrow is an indication of trust between the banks and also availability of reserves to lend. You got rid of that. And so after what’s it last year, the year before, I’m losing track now they said okay, no more Libor and now we have to use sofr, which is a secured rate.

And the secured rate is going to show a lot more resiliency to banking stress. I mean my theory is, yeah, you’d probably see the repo rate ticking up, but probably not, certainly not nearly what, what the Libor rate would do, you know, in a crisis. So they’ve, they’ve dampened the signal massively to the point where you need maybe more sensitive instrument to even see the signal, you know, in the noise. Yeah, take bad, take bad assets off their balance sheet, address what they call maturity transformation, what I call duration mismatch, which can be the source of a lot of crisis.

And the Fed for a while had a reverse repo facility where to deal with the issue that the banks bought massive amounts of treasury bonds in summer of 2020 when 10 year treasury yields were at 0.65% which means that the price on those bonds was very high. And by about the Time that Powell was done hiking rates in. When was that? Summer or fall of 2022. The price of those treasury bonds had fallen. I think it was something 22 or 23%. So now the banks of course not marking to market. The suspension or elimination of mark to market was the fix for the 2008 crisis.

In fact, when they, when they announced, when FASB, the Financial Accounting Standards Board announced, hey good news guys, you don’t have to mark your losses to market anymore. That was almost to the day when the stock market hits bottom and everyone said oh, happy times again. And then we had one AL rally that became I think the longest bull market in stock market history by good margin that occurred after that. So anyway, so the problem with the banks is they have this duration mismatch where they have in a short term liabilities, let’s say customer deposits, long term assets, the treasury bond will pay money good in the end.

The problem is if the market price is down and you’re getting withdrawals or redemptions as Silicon bank bank was getting, Silicon Valley bank was getting, then you have to sell, you can’t wait for the bond to mature and pay out the cash value. You have to sell it in the market. And the impaired price, which is 22, 23% down from what you paid for it is what you get in the market. And so you’re taking a 22, 23% capital loss for every bond you have to sell. If that has, if that happens in sufficient volume, you know, you’re dead.

So the Fed said okay, we’ll repo these at the price you paid for it back in 2020 rather than current market price allowing the banks to park those assets. And yeah, this is the so called BTFP or Bank Term Funding Program. Right, right. It was one of those acronyms. Yeah. So the Fed has a variety of different aces up its sleeve depending on where precisely the stress is heading and then they can relieve the stress. And I think it’s pretty clear that’s going to be the modus operandi as they go forward. They’re not going to try to allow another 2008 to occur.

So we’ll see. I mean the ratio, the repost to reserves ratio is already past the repocalypse of 2019. 83, it’s already 88. It’s not going to stay at 88 because we’re at the month end where things are a little bit wonky over here. But it’s, it’s still trending higher. So I mean we’ll see if I’M right, this is going to happen. They’re going to have to start expanding their balance sheet again. The question is, how much are they going to print? Is that going to be the end of the dollar? I would assume that you say no, there’s going to be a few more rounds of this, a few more years.

And I’m saying maybe it will be the end. I mean, we’ll see. It’s, we’re going to have a test case pretty soon, I think in the next coup of months. Now, one thing I have to always add by way of caveat, you know, it’s, it’s convenient and sometimes easy, especially for lay audience to think in terms of print, that they just create something ex nilo out of thin air. What the Fed is actually doing is borrowing, right? So that, that reserve is, is a credit. So the bank holds this, an asset, the Federal Reserve, that’s the liability of the Fed.

So they’re issuing a liability in order to fund the purchase of an asset, in this case the treasury bonds. Now, that distinction may not seem like that matters that much, but it’s all the difference in the world. Because if we’re truly printing, then we would have had the hyperinflation that a lot of people were predicting many, many, many, many years ago. But instead, everybody’s going deeper into debt. The liabilities only increase, including the Fed’s liabilities, including the bank’s liabilities. Everyone’s drowning deeper and deeper and deeper into debt. And if you wonder what the hell keeps the dollar stable, why hasn’t this thing blown up? It’s the struggles of the debtors.

You know, if you don’t owe any money, then you have a choice whether you want to hold a money balance with what people call money. Even the Austrian economists, I’m a pariah in the Austrian economist community for saying gold is money, dollars, credit. Even the Austrian economists don’t agree with that, let alone anyone else. So if you want to hold what is, what is called money, then you are, you know, financing the, the debt. And you, if you owe money, you have to hold a buffer. I mean, think about if you don’t owe any money, let’s say you have a small business and you print business cards and, and you know, sales flyers and that sort of stuff.

You don’t owe any money whatsoever. You’re free to hold 100% of your company’s, you know, cash balance, balance such as it is in gold, silver, Bitcoin, you name it, you could do that. And then you can think about the Volatility and whether you want to hold Bitcoin or silver, whatever, but you could if you owe $10 million and that $10 million is at 6% interest, which means you must pay $600,000 a year or $50,000 a month. And your, you know, your profits are $51,000 a month, you know, you’re running at super, super razor thin. You know, you’re on very thin ice.

Hot ice. That’s right, hot ice. I heat up the ice cubes. It’s the best of both worlds. And so you are going to want to hold probably a couple million dollars as buffer to protect you from, you know, you can’t have a bad month and lose your whole business. So the deeper everybody goes into debt, perversely and ironically, the greater the demand for what people call money. And as debt keeps going up and interest rate keeps falling, that drives the debt up further. I’m aware that right now the interest rate’s up, but it’ll resume falling again.

And this is the demand for money. And so the Fed and the other central banks are really no different with their respective currencies. Seemingly has unlimited license to abuse its credit. The treasury has a seemingly unlimited license to abuse the Treasury. So let me interrupt you here for a second. That, so you, I think in my head what you’re describing is you’re saying the more people owe, the more demand for dollars there are. And that’s what’s keeping the system basically in tune though, falling down some kind of incline. But the, I, I guess the analogy in my head is you’re in a car and you’re slamming the gas, but you want to maintain the same speed.

So you’re, you’re slamming the brake at the same time. And now if we continue on that analogy, at some point the brakes are going to give out and then you’re just going to have gas and you’re just going to like zoom off a cliff. What is that point when the brakes run out? I mean, the, I think Daniel Oliver, sorry, Daniel Oliver describes it as the, the Fed defaults. But how, how does that mechanically happen? So the Fed could get itself into a situation where it’s cost of funding, so it’s net interest, its interest expense is greater than its interest revenues.

It’s already there. It has, it has an operating loss. I mean the remittances right to the treasury are negative. I think it’s like negative 200 something billion dollars now. Right, because it’s, but is that curable or is that incurable and intractable? It’s curable. All the Fed is to do is lower interest rates again. So as a practical matter, as long as they’re willing to play monkey with the interest rate, and this is the problem with central planning is look at all the factors, both mostly political, for why they’d want higher rates or lower rates, and none of which have to do with economic reality anymore, as long as they can lower interest rates.

And I think before, the Fed would actually crash and burn and die and take down, you know, the dollar, you know, with it, and then with that take down the US Government, they’d go to lower interest rates before they let that happen. Yeah. Then a mechanical level, that can’t really happen. In my dissertation, I talk about what Armageddon really looks like. Well, we’re boned. And I wrote probably my most important article called When Gold Backwardation Becomes Permanent. Right. I read that talking about this idea that in any normal commodity, if the price of spot is above the price of the contract to deliver in the future, that’s called backwardation.

And that’s a sign of scarcity. So you can imagine if the wheat harvest comes in in July and you show up on June 30, and so I want to buy wheat. You’d imagine the price for wheat, for physical availability right now, like cash on the barrel head, was much higher than a September contract. But backwardation should never happen in gold, because gold, first of all, isn’t produced on a seasonal basis the way wheat is, and it’s not consumed anyway. So virtually all the gold produced in 6,500 years of human history, at least as far as that we can document.

So there was a warrior king that they unearthed in a cave in Bulgaria. I read the article last year. I don’t know when the actual archaeology took place recently, I believe, dating back to 4,500 BC, 6,500 years ago. And this guy was buried with seven kilos of ceremonial gold. So virtually all this gold is still in somebody’s hands. And there should never be such a thing as a scarcity or shortage of gold. If there’s a backwardation, what’s scarce is gold to the market. It’s a willingness. If there’s a backwardation, what backwardation means is that I can give you my gold bar, pretend this is a gold bar in exchange for a piece of paper that says I’m going to get my gold bar back, plus, let’s say $20 in a month.

And for some reason I’m like, nah, bro, I’m all good. Right? So what’s happening is collapse of trust in the counterparty, that the solvency of the banking system is being questioned. And so what I wrote in when back with Goldback Becomes Permanent, I talk about it in my dissertation, is when that trust gets to that point where people won’t trust the counterparty, then essentially gold ceases to bid on the dollar. Now this is a profound concept, but hard for people to get their heads around because everyone thinks of gold is being offered in the dollar market.

You can say, okay, well, gold is being offered today at 2200 and change, right. And I say, you got to flip this. Right? And excuse me, 3200, not 2200. I misspoke. You got to flip this and say the dollar. Gold bids on the dollar. It’s money bidding on the non money, not the other way around. Yeah, yeah. The only people that understand this and that have articulated this way are you and Daniel Oliver of Mermaid. You’re the only ones who understand this at least fully in on the level that you do. So I mean, I hope that you talk to him one day or make some kind of business deal with him.

Maybe him and Monetary Metals can work out some kind of deal. Yeah, I love that guy. We were sitting around in New York in a French restaurant, of all places. I can picture. I can’t tell you the exact address, but it was kind of upper, you know, midtown maybe in the 57th street area or something. And you know, he said, you know, the whole world, believers in the quantity theory of money. There’s less than a handful of us that are reject that. And believers are adherents to the quality theory of money. And you know, it’s like, welcome to the club.

There’s very few of us. Oh, you, you actually, you actually spoke to him? Yeah, yeah. No, no. Yeah, yeah. I love to be in that room. It’s only a door, as they say. We should get together and have a little club or something like that. So anyways, you know, I tweeted when it happened, I guess a month ago now I lose track of time when the dollar broke down below 10 milligrams. So the dollar is a price and that price should be measured in gold rather than measuring the price. Gold price in dollars. And I like the analogy of suppose you’re on the deck of a ship, and number one, the ship is slowly sinking because there’s little holes in the hull.

And number two, there’s a big storm and the waves are going up and down, you know, 20 meters. And so you’re standing on the deck of the ship looking at a lighthouse, which of course is attached to the dry land. And you say, why is the lighthouse going up and down and mostly up? Well, your vantage point is just not objective. You’re looking at things the wrong way. If you could just simply get in a drone and go above the whole thing, you could see the ship doing this. The lighthouse isn’t going anywhere. And you say, oh, I get it now.

So people love, you know, talk about the gold price going up. Very exciting. It’s actually the dollar going down and it fell below 10 milligrams. Okay. Is there any particular limit as to how far it could fall? Well, history tells us no. Every irredeemable fiat currency ever preceding the dollar has gone to zero, and the dollar will too, and. And it’s just not yet because there’s an awful lot of debtors in the dollar globally. So getting back to the mechanical point, I guess the broadest way to say it is that at some point there’s going to be massive defaults by the people in debt.

They’re not going to be able to pay, and then the Fed’s going to pick up all that. That’s basically what happened 2008. Then the Fed’s going to pick up all that, put it on its balance sheet, or they’re not. But either way, the dollar is going to collapse at some point through that mechanism. We don’t know how much longer it has. So. So in my, in my theory, which, you know, is unique to me, it’s when the gold market pulls its bid on the dollar. So really important concept here is that in times of crisis, every live market, there’s two prices, not one price.

There’s bid and there’s offer. And normally people, I mean, traders, are aware of this. Economists seemingly not. Mises hardly talks about this at all. Menger did, but Mises didn’t. Bomb, didn’t. And then after that, Hayek and everybody just didn’t. There’s two prices, bid and offer. And people think of them as pretty close, and usually they are, and that they move together, and usually they do. And you can sort of think of the quote, unquote, fair price as maybe the average or midpoint between the two, which really isn’t accurate, but like a lot of inaccurate things, sometimes it’s close enough like horseshoes and hand grenades, and people get away with it.

Okay. But in a time of real crisis, it’s always the bid that goes away, never the offer. Plenty of people are happy to sell, but the buyers disappear. So I like to use the example, suppose the U.S. geological Survey says there’s going to be an earthquake. It’s going to be a fact 19 on the Richter scale. Nothing taller than a dollhouse will be left standing. What you would see is no lack of offers to sell real estate. However, there’d be no bid, probably from Santiago, Chile, all the way up to Victoria, British Columbia, and all the way from the Pacific coast, probably to the Mississippi River, a massive area.

Would be no bid until the earthquake happened. Then after it’s over, there’ll be a new bid in the market which could be a lot lower depending on what was destroyed in the destruction of the dollar. You can’t understand this by looking at. And I was at a conference where very prominent, after I’d all written all this stuff, but a very prominent thinker and, you know, media personality, analyst and economist said, yeah, that gold, the offer to sell gold is going to withdraw and it’ll be, it’ll be na. On the, on the board, I’m like, oh, so close and yet so far.

Yeah, yeah, I get that. I get that a lot. They, they unders. They just can’t make the last step that the money is the gold and the dollar is just a derivative of it. They can’t. That, that’s, that’s that last step that nobody gets. So it’s. But here’s the thing. It’s the people who own the gold that call the shots, all the rest of the stuff. The Fed can do this, the Fed can do that. And if the question is will the Fed always, always, always have one more ace up its sleeve, the answer is yes, of course there’ll always be one more thing.

They can do it, create some new unprecedented precedent and do it. But it’s the people who own the gold that are calling the shots. And when they decide we’re not bidding on the dollar anymore, at that moment, it’s over. And I describe in my paper how prices will hyperinflate. People call it hyperinflation, but it’s not exactly. And people will say that it’s to do with the quantity of money, which has nothing to do with it, is the repudiation of the credit by the only people that have the means, the teeth to their preference, which are the gold owners.

And when they decide we’re pulling back and saying no mas, then it’s over. And the price of everything else in dollar terms will, Will go to infinity. Because that’s how people. So it’s asymmetrical. The dollar is bidding on gold. It’s gold. Not bidding on the dollar anymore. So what do you do if you want gold, if you can buy crude, if you can trade your dollars for crude oil? Well, gold will bid on crude. So that’s a backdoor to get some gold. And so what’s going to happen is the price of crude in dollar terms going to bid to infinity.

And the price of crude in gold terms would be collapsing near zero. And this is the breakdown of society. This is Mises crack up, boom, all sorts of bad things happening. And yes, the collapse of certainly government, probably civilization because it’s also the collapse of production especially and most importantly the production of energy and food at industrial scale. And if that happens, I don’t know where you live, but where I live in Phoenix, the desert, there’s no life without water and there’s no water without electricity because the wells are like a thousand feet deep. So if the electricity turns off, Phoenix is going to be a dying ground and everyone’s going to try to drive out of town and there’s not that many roads and all go deeper into the desert before they get anywhere.

And you know, it’s going to be a horrific, you know, scenario. I don’t think this is close. I don’t think this is tomorrow morning or next year in the dollar. We’ll see all the other currencies fail first. I think that’s important to say. But anyway, that’s the mechanism as, as I see it and I, and I predicted it. Okay, well, I’m praying for your safety in Phoenix or in Dubai, which is also another desert where you are. You seem to love deserts like Moses. Did he love the desert? He was a desert man. No equivalent there.

I’m just part oceans. I can’t do that. I am a client of your service, Monetary Metals. I have some gold there and some silver. I noticed that recently you have been able to pay. I understand the whole concept of leasing that you. That instead of reaching out to the futures market to hedge their inventory, they go to you for a cheaper price. You make the market. I get that. How is it that you’re able to now suddenly pay 4% on all gold deposits, whether in a lease or not? How does that work? So first of all, I want to talk about the 4% because for quite a long time it was three we were offering, but.

And this was economic theory that became a business thesis. Gold comes to market for interest and there’s a proportionality. Higher interest rates draws more gold faster. So we offer higher interest rates to attract more gold because the demand is so high. So how do we pay interest? So right now we are paying interest even before your gold goes out on a lease. How the hell do we do that? That’s called, you know, marketing expense. We want more gold in because the demand to put it out on lease is so great. We are very confident that we’ll put it out in less than a month.

And so yeah, we eat a little bit of cost in order to get the gold to grow market share, grow the business and just make it a nice simple value proposition to customers instead of like, well, when do I get interest on my gold? You get it immediately and then, you know, we’ll put it into at least. So what’s your response to people who accuse you of fractional reserve when they see that? I mean, you know, in your intro, you know, you said we’re honest bank or something like we’re actually not a bank. There’s no financialization, there’s no leverage to this.

There’s no borrowing or lending. You know, you give us an ounce of gold, we find a jeweler, refiner, mint recycler, manufacturer of, I don’t know if you are familiar with or your viewers are familiar with these things called gold backs. It’s two thin layers of clear plastic with very, very, very thin foil gold sandwiched in between. This thing happens to have 1/1,000th of an ounce of 24 karat gold. It’s just slightly smaller than a dollar bill. And so we lease gold to the manufacturer of that. Goldback is a marketing company. The manufacturer is a company called Valorum that we lease gold there.

So there’s about a dozen different verticals where they use gold physical metal in the business. And they can either, as you said, borrow dollars and buy the gold that they need for inventory or work in progress. The problem is you borrow a million, you buy a million worth of gold. If the gold price drops 10%, which it could do, you’re insolvent because now you have a $900,000 asset, you still have a million, you still owe a million dollars, so you’re dead. Or you lease the metal and you offload the price risk to somebody else. In our case, that’s the gold investor.

The people own the gold are taking that price risk deliberately as part of a portfolio allocation. So to the investor, that’s not an existential risk. To the business loaded up with that much gold, it is. So it is a one to one correspondence. You give me an ounce and then 919 other people give us an ounce. We put a thousand ounces into jewelry store X or into Valorum or into whichever refinery. And there’s no financialization to it. There’s no dollar value to it. There’s no hedging, there’s no borrowing, there’s no lending. There’s no credit of any kind.

Fractional reserve is simply inapplicable. You know, it’s like saying, what’s the MIDI setting on that Martin acoustic guitar you’re playing? You know, these guitars that are like double guitars, you know, there’s no MIDI on. It’s. It’s a piece of wood with nylon strings over. That’s it. It is what it is. There’s nothing more than that. And so gold comes in. Yeah, we’re eating the cost of paying a little bit of interest in the same way that we eat the cost for advertising, the same way that we eat the cost of paying our sales team to talk to customers and get customers all the information they need so the customers can make a decision to deposit gold.

There are costs in acquiring customers and one of them is paying a little bit of interest. But we are able to deploy that gold so quickly that we’re not paying very much interest for very long before it goes into the next lease sale, which is where we want it to be and where our customers want it to be. So, yeah, there’s a little bit of cost there. We eat that. As marketing, the reason I have you on this this week is that I, I dipped my foot or dipped my toe into the whole basil 3 argument because a lot of people were asking me about it and I really, I didn’t want to say anything about this because I don’t really understand how multinational banking regulations really work.

Can pretend to, and I can sound smart, but like, really when it comes down to it, I don’t really know what they’re talking about. So I was just looking around and for anyone who would say something simple about whether basil3 can affect the gold price or not, and you were the only one that I read that. I was like, okay, well, that makes. I get that. And there was no one else on your side, from what I could see. And I think your, your thesis is, I think, correct, that Basel 3 has really nothing to do with the gold price at all.

And I. And the, the deeper problem with people who think that the bank, the bank for International Settlements will affect the gold price is that I don’t think banks are gold conscious. I don’t think they know the truth any more than anyone else besides you and Daniel Oliver. Know the truth. Even the Austrian economists didn’t, didn’t understand fully that gold is money and the dollar is credit. And that’s why I think Anel fte one of the reasons that he has the neo Austrian school or whatever he calls it, and you’re his, you know, his student. So, you know, I might be wrong in the details there.

I don’t know exactly, but I, I agree with you and with, and with Daniel Oliver. So what, what is it? How do people get this so wrong that they call gold a tier one asset? What. What are they even talking about? Ayn Rand said something. This goes back 60 years, probably, maybe more. It was like if you observe a political movement achieving the exact opposite of what they say they want to achieve over and over and over, year after year, decade after decade, and they seem undeterred by achieving the exact opposite of what they promised they want to achieve, then what you’re seeing is not what they really want to achieve.

What you’re seeing is rationalization. And a rationalization is a, I guess a set of comforting lies that one tells oneself in order to maintain one’s, you know, comforting illusion or whatever that may be going on. And this is a kind of. She was talking about this as a way of understanding political movements like socialism. But I say, and we certainly have modern political movements that shall remain nameless that I think operate this way as well. But the same thing. There’s a lot of people in the gold community that just want gold to go up. And as I said, it’s actually the dollar going down.

Be careful what you wish for. If the dollar hits 1 milligram or probably even 2 or 3 milligrams, it’s not going to be a very pleasant world out there. Yeah, you’ll have a lot more dollars if you own a lot of gold. But it may be a really horrible world. Imagine having a Ferrari in Caracas, Venezuela. You wouldn’t dare show the feet in that, because one of two things could happen. Either they’re going to force you to leave your car at gunpoint, or they’re just going to trash it and throw Molotov cocktails in the window because they want to destroy it.

There’s a lot of anger in a place like that. Collapse into that kind of abject poverty and ruin. Now get out. Get out. We call it the Denver jock strap. So I, I’ve waded into a number of controversies as an economist and as a gold guy. Probably most famously, you know, my argument. Gold’s not suppressed and manipulated the way the Conspiracy theory holds. Ted Butler wrote this article where he’s like, look, I’m emeritus now. I’m retired. I’m an old guy. I’ve given my body of work, blah, blah, blah, blah, blah. Here’s what I’ve demonstrated over my life’s work.

And in the spirit of collegial, you know, just, you know, dialogue, I encourage anybody to present thoughtful disagreement. And I wrote something called Thoughtful Disagreement with Ted Butler. And I, and I provided the data to say, look, it’s not manipulated the way you say it is. And you know, this just generates hate mail and F bombs and all this stuff. Basil is kind of one of those things. So before the show, I just googled around to see what was being said about Basil and Gold. And a bunch of my stuff came up in some of my old video interviews.

I did something with silver bullion. I did at least another one. I don’t remember who that was with. And then I came across your substack and then you linked something on Twitter with this guy screaming in all caps, keith Weiner’s a liar. Why is he lying? Blah, blah, blah, blah. And I’m just like, number one, these concepts are fairly abstract. If you don’t understand it, first of all, you should think to ask questions, not, you know, yell. Number two, even if there’s a disagreement doesn’t mean somebody else is lying. I mean, I’ll explain what’s wrong with the prevailing view, but I’m not going to call anybody a liar.

I think they believe it in earnest. They’re wrong, but I mean, you know, they’re not liars, but, you know, they’re wrong. So this, this is one of those areas where everybody just wants the price of gold to go up. And Basel, you know, changes the rules for gold. And somebody early on claimed gold was, was deemed under, under the Basel regulation to be a tier one asset, so called. Now there’s, I think there’s a reason why people kind of misunderstand that. And I just want to first quote Michael Crichton, if you Google with something called gel man amnesia, just people read a rubbish story on page one of the newspaper and they say, oh, these guys are idiots.

How could they say that? And by the time they turn to page two, they forgot all about that. And the next story, they’re very credulous, you know, all over again. So they’ve forgotten that page one was rubbish. Anyway, Michael Crichton is talking about this and he said, you know, it’s a story that says wet street causes rain. The newspaper is full of them and stories like that. So I think these are predominantly retail investors in the gold community that are about this stuff. Retail investors don’t really think about a balance sheet because you’re investing your life saving things.

It’s not like you have a balance sheet full of liabilities of various different kinds of borrowings of different colors and different tenors and all that to fund the assets. You don’t think that way. You’re not aware of it. Of course. That’s exactly how a bank operates. And so you just think, okay, this asset is better than this asset and so on. So they think that gold was declared as a Tier 1 asset. Tier 1 for banks refers to banks capital, I. E. The liability side, not the asset side. And if you don’t really get the balance sheet then this is just so much like imagine going to a two year old girl, just wants a horse for her birthday and you know, you’re in the garage and you’re going to cut a sheet of plywood and so you have a sawhorse.

She’s like, what’s that? And you say, this is a sawhorse, honey. You know, we can make another one. You want to watch me do that? And then she’s skipping and prancing around the house, mommy, mommy, daddy’s gonna make a horse. And she hears sawhorse but doesn’t hear the word saw because it doesn’t fit into her model of the world. She doesn’t know what that is, she doesn’t know horse. And that’s what she wants for her birthday. So she gets all excited about it. And so they hear tier one. That sounds good, right? Tier one sounds better than tier two or tier three.

And so, oh, you know, gold is better. Well that’s referring to the liability side which could be deposits. Banks issued bonds, they borrow in the commercial paper market, they borrow from the Fed at various windows, they borrow in the interbank market with sofr, Libor or whatever. And so people think, you know, it’s about the asset, but it’s really about the liability side. And gold is not on the liability side. But banks aren’t taking gold liabilities. You know, we live in a. So wait, if tier one, if tier. If gold being tier one refers to the liability side and gold and banks don’t take gold liabilities.

So then what is the meaning of gold is tier one anything? It’s just simply a mistake. Basil never says gold is a tier one anything. Basil talks a lot about tier one and tier two as capital. And some somebody said gold was Tier one asset, but that was made up somewhere and I don’t know who said that, I don’t know when that was probably at least a decade ago, maybe more. I can’t trace the origin of it, I haven’t. So anyway, so Basel is the central planner’s attempt and I’m going to pick my words very carefully.

Attempt, meaning it’s not necessarily going to work. It can’t work, in fact, but it’s their attempt to try to stabilize the banking system, given the fact that, number one, we’re using a failing regime of irredeemable currency, and number two, that there’s a ton of moral hazard, AKA perverse incentives. So you offer banks, you offer anybody a perverse incentive. Imagine if your kid is like, I need some money, I’m going to go get a job mowing the neighbor’s lawn. And you’re like, no, here kid, here’s 200 bucks. That’s a perverse incentive. So what is the kid going to do? He’s not going to mow the neighbor’s lawn, he’s getting more money just by sitting, playing video games.

So the system is prone to. So the regulators think that they can prevent by micromanaging and actually supervising. Most industries are regulated, which means you kind of have to get a license and after that you have to report on what you did and show them that you didn’t do any of the things that you’re not supposed to do. Banking banks are actually supervised, that they’re micromanaged by the government and by the regulators, including the central bank office, the controller of the currency, fdic, endless different regulatory agencies telling banks, do this, don’t do that, own this, don’t own that, market this this way, don’t market that way.

And so in light of all that, there are tons of perverse incentives. Now how do we not have the banks do anything that will lead to systemic instability given the perverse incentives? Okay, that’s sort of the backdrop. So Basel and any regulator, they call it macro prudential regulation. So at the top level, prudential try to make the banks prudent in some way and they’re trying to regulate them. And broadly it looks at both the liability side and the asset side. Now gold is talked about on the asset side and you have to have a haircut and there’s volatility and this and that and the other thing, but the real action, and that’s always been that way because in dollar terms, the gold price moves up and down.

And if the bank owns gold as an asset, when the gold price goes up, that’s great, obviously, happy day. If the gold price goes down, okay, the bank has a risk and so it’s supposed to do various things including hedging and haircut, the value of the gold, all that, okay, fine. But the real action in Basel III is on the liability side. So what Basel is trying to do is it’s trying to say that banks got into trouble, recognized that banks got into trouble in 2008 because all the various sources of funding that could be pulled.

So these are bank liabilities. If the bank had issued commercial paper with 30 day maturity, when that paper matured, the creditor would pull it back and say, we’re not rolling it over. Deposits could be pulled and interbank lending seized up, Libor spiked and became almost invalid for a while. All these different sources of funding, the short term funding, anything that could be pulled would be and was in fact pulled. And so when the funding is pulled, the bank has to sell assets in order to, you know, repay the creditor, otherwise they’re dragged into bankruptcy proceedings. And so then you get this endless dumping of assets, markets crashing and all the stuff that regulators don’t want to see.

I think in your blog post you talk about that Basel is trying to help them build an inflationary pyramid. The last thing they want to see is deflation. Now, in my parlance, inflation is the counterfeiting of credit. And so I agree with you, that’s what they’re trying to do. Deflation is any forcible contraction of credit, which they hate. So all this collapsing selling of assets, right, is deflation. So they want to prevent all this. And so on the liability side, they’re saying different kinds of assets need different kinds of funding. So if your asset is short term T bills, they’re not worried about the funding because the asset and the liability will mature together.

Not a problem. If the asset is, I don’t know, residential mortgages with a 30 year maturity and a fixed interest rate, then you need different, much more expensive liabilities in order to fund that asset. So what they did for gold is they said in your blog post you said gold requires funding. I mean all assets require funding in order to buy something. You have to have the cash to buy it. The question is, what is the source of that cash that’s acceptable. And under Basel III they said 85% of the funding, if you’re going to buy gold as an asset, has to be so called stable funding, which is equity capital.

Sale of shares, retained earnings is equity capital and some degree of long term bonds. So the bank can sell 10 year bonds. Now that’s very expensive capital. Equity capital is precious and expensive. 10 year bonds are expensive. So the bank has to use expensive capital to buy gold as an asset versus other assets. T bills, they can use cheap capital to buy it. So it is a disincentive for the bank to own any kind of gold as an asset on its balance sheet. People talk about if the bank has allocated gold and I think in your blog you dispatch that very well.

The bank doesn’t actually have that. The bank is just being hired, nothing more than a custodian. If I buy a million dollars worth of gold through HSBC and say store, I want serial numbered bars, I want photographs of. These are pat bars with serial number 123-412-351236 and so on. And I just want them stored in the vault. But I want you as a custodian so I can call up and have you liquidate them or whatever I want to do. Then the bank doesn’t have the gold. It’s my gold. The bank is just simply acting as a trustee and the bank is not taking any risk and therefore there’s no funding associated with that.

And that’s so called allocated gold, if you want to call it that. Unallocated means I’ve given the bank my gold for the bank to do with what it will. Now it becomes the bank’s asset and same problem occurs. So you get into a perverse situation. The bank may actually prefer its client to have allocated gold and unallocated because you know, unallocated actually caused a problem for the bank under the Basel regulation was allocated. You know, the regulators don’t care because it’s not, not a bank asset. I don’t know if I, that explanation makes sense. Yeah, yeah, that, that clarifies it a little bit from a slightly different angle.

But yeah. So I, I hope that this settles the. I don’t think it will among the gold community, but I hope, I’m kind of, I’m hoping that we stop talking about Basel III and the next. Basically people are looking for the next quick fix. Like what’s the giant? What’s the giant? Cause that could, that could force like this sudden revaluation of gold in the market. And people look at Basel 3 and they say maybe that’s it. But it’s not. I, I think it might, it might be the repositories ratio. It might not be. I could be wrong on that.

But we’ll see in A few months, if I’m right about that. But there’s going to be something and it’s going to happen. I just don’t think it’s going to be central banks that or the bank for International Settlements that’s going to cause it. Definitely. I was going to say, generally you don’t get it. I mean, until the end, which nobody should be wishing for, that’s going to be a horrific scenario. There isn’t a sudden revaluation. I mean, look at what happened over the course of 2024 as we go from essentially $2,000 to well over $3,000. I mean, you know, part of me wants to say that the gold people.

Look, is that not enough? You know, channeling Russell, what’s his name? Russell Crowe from Gladiator. Are you not entertained? He knows he’s doing this. I’ll put the meme in. Are you not entertained? Are you not entertained? You, you know, I mean, it was an incredible run up and, and I don’t, by the way, I don’t think it’s over by any means. Right. I was bearish for a long damn time. People hated me for that too. You know, during the, we’ll call it the dark years of 2012 through 2018, I put a lot of bearish materials. Look this, it’s not happening, guys.

You’re putting that picture that moonshot up. It’s not, you know, now I’m bullish because I’m saying look around the world. If you think the dollar is problems now, go look at the Turkish lira, look at the Indian rupee, look at the Chinese yuan and the Arab world, they’re buying gold. There was a lot of concern and we have lessees here that are jewelers. There was a lot of concern that for, you know, the Arabs like to buy gold at the end of Ramadan. I don’t think how you say it either. Eid, I don’t know. And with the price at all time record highs, there was a lot of concern that you might not be a lot of buying.

Well, there was, there was a lot of buying. So even at, you know, 3300, 3400, they’re buying now in, in this part of the world. It’s not because they’re, I mean some of them are tourists and they’re coming from places like Pakistan or wherever where the currency is toilet paper. The currencies here, the GCC currencies are pegged to the dollar. And you know, many of them are table flat. If you look at a 30 year graph of the price of the currency in dollars. They’re stable. You don’t have to worry that you’re slipping against the dollar.

With, you know, the uae, Durham for example. It’s been stable and yet they’re still buying gold either because they don’t love the dollar or they don’t love US policy or foreign policy or monetary policy or some combination above, or they don’t trust the peg or who knows what the Geopolitically, there’s a million reasons to feel some fear and that’s fueling the trade. I think we have a very different motivation driving the bull market now versus 2009 to 2011. At that time the trade was the Fed is printing us to hyperinflation. Buy gold because we’re going to have hyperinflation imminently.

A very prominent speaker at Freedom Fest in July of 2009 said we’ll have hyperinflation by the end of the year. That was 2009, 16 years ago. And so people were buying gold and I wrote about this at the time saying you’re buying gold for the wrong reasons. I mean there are good reasons to buy gold, but that’s not one of them. And so when that proved not to be the case, it was obviously not going to be hyperinflation by 2011 or 2012 or whatever. Then all those people who bought on that reason sold because their thesis wasn’t validated.

And obviously some of them made money because they bought at 1000. They sold it 1900. Okay, great. Some of them lost money because they bought it 1900 and sold to 1600 a couple years later. And anyway, you get into this endless bear market depression, blah blah blah, blah. That’s not why people are buying now. Nobody’s talking about hyperinflation of the dollar at the moment, hyperinflation of the rupee maybe or hyperinflation of the lira. So what are they talking about? I would say in general credit worthiness, geopolitical tensions. I think there is a trade that’s not correct, which is that the rest of the world is going to somehow repudiate the dollar and there’ll be another currency that becomes the world reserve.

There’s nothing that comes remotely close to being able to replace the dollar. Not to mention the managers of all these other currencies do not want their currencies to become reserve anyway. They don’t want to hollow out their industries and do all the things that is perceived us has done so. But anyway, it’s a lot of good reasons other currencies failing, credit straining to the limit, as you point out. Why do you want to be a creditor exactly in an environment where the debtors are increasingly struggling, the dollar may go up, but you may be wiped out because you’re a creditor.

So it’s a very funny world, but that’s the world we’re in. All right. So thanks for coming. Have a good time in Dubai. Make a lot of deals, I hope is a really strong time for Monetary metals. And if you’re interested in Keith’s offer of 4% interest on gold when you put it in, and he will lease it out to jewelry companies and other companies that make those things like that gold back, that gold backed sheet or that gold sheet sandwiched between two plastic sleeves, then, you know, check out monetary metals in the link in description below.

And I think it’s a good place to put some of your holdings, not all of them, but some to earn some interest and in gold terms and silver terms if you want to deposit some silver as well. So, Keith, thanks for coming on and have a good May. It’s May 1st, Rosh Chodesh. And I’ll see you, you know, sometime soon in the future, I’m sure. All right. Thanks so much, Rafi. All right.
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See more of Rafi Farber on their Public Channel and the MPN Rafi Farber channel.