The Real Reason Gold Dropped: It Is Becoming The World's 'Neutral Asset' - Peter Boockvar

The S&P 500 just hit all-time highs while inflation runs at 3.8% and real incomes fall for the third consecutive month. At the same time, gold has pulled back 12% despite ongoing geopolitical turmoil, and global bond yields are hitting multi-decade highs. Kitco News Senior Anchor Jeremy Szafron sits down with Peter Boockvar, CIO of OnePoint BFG Wealth Partners and author of The Boock Report, to decode the market's most glaring contradictions.

Boockvar breaks down the reality of this morning's PCE inflation print and explains why the long end of the bond market has officially seized control of monetary policy from Kevin Warsh and the Federal Reserve. The discussion uncovers the real reason gold sold off—and why its structural transition into the world's "neutral asset" for global trade is actually accelerating. Discover what the record 6% default rate in private credit signals about the K-shaped economy, why the AI trade is hitting physical commodity constraints, and where Boockvar is finding high-yield defensive opportunities as the two-speed economy cracks.

Recorded May 28, 2026

Follow Jeremy Szafron on X: @JeremySzafron (https://twitter.com/JeremySzafron)
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Chapters:
00:00 The Gold Pullback
01:32 The Bull Case
02:54 Inside the 3.8% PCE Print
03:54 Structural Inflation
07:16 The K-Shaped Economy
09:17 Warsh & Fed Politics
12:10 Bond Market Takes Control
15:17 The Liquidity Boom
16:30 Gold's New Monetary Role
20:22 When the Thesis Breaks
22:07 The Silver Setup
23:41 The AI Trade
26:28 Private Credit Stress
29:37 AI's Inflation Problem
33:52 The China Tech Threat
35:42 The Defensive Rotation
37:52 Agriculture & Fertilizer
39:57 The Next Gold Catalyst
42:25 Japan & The Yen
43:48 What Markets Get Wrong
45:03 Closing & Subscribe

#Gold #Macroeconomics #FederalReserve #PeterBoockvar 
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Disclaimer:  
The videos are not intended to provide trading advice, and the views expressed do not necessarily reflect those of Kitco Metals Inc. Kitco News, its anchors, producers, and reporters are not responsible in any way for the performance or actions of any sponsor, advertiser or affiliate of Kitco News. In no event will Kitco and its employees be held liable for any indirect, special, incidental, or consequential damages arising out of the use of the content in this video.

Transcript

SPEAKER_00 0:00

Kitco News in Focus with Jeremy Saffron. Welcome back. I'm Jeremy Saffron. Gold is trading around $44,000, $4,500, roughly flat. Silver also around $74, also little change, platinum, palladium under pressure. But here's the bigger picture here. Earlier this year, gold was trading above $5,000 and now roughly 10 to 12% off of those highs. Now, that move lower happened while inflation surged, while oil spiked roughly 55% in a matter of weeks, and while global bond yields hit multi-decade highs, gold was supposed to perform exactly in that environment. And at the same time, a single semiconductor stock added $200 billion in market cap in one day. The SP just hit all-time highs and is pushing towards new records again today on reports of a potential Iran ceasefire extension. And also some data. According to the Bureau of Economic Analysis, real incomes have fallen in three months in a row. Now, my guest today has been mapping every piece of this and getting it right, by the way. Peter Bukvar is CIO at 1.b FG Wealth Partners, a $16 billion firm. He author uh authors the Book Report, the daily macro analysis on Substack that everyone feels like, or at least serious investors, read before the market opens. He called the bond bear market before Wall Street was ready to hear it, and he publicly bet zero Fed rate cuts in 2026 when the consensus was still pricing in several. Peter, welcome back to Kit Code. Good to see you.

SPEAKER_01 1:29

Good to see you too, Jeremy. Thanks for having me.

SPEAKER_00 1:32

So, I mean, we can start here. Gold off of its highs, inflation just printed 3.8%. Is the bull case still intact?

SPEAKER_01 1:40

I I believe it is. I think what you're seeing in gold, uh, and also what you're seeing in silver is a digestion and a consolidation of the dramatic rise that we saw last year and the early part of this year. Uh we know you can't sprint forever. You need to take a breather, and I think that's exactly what's happening. Now, granted, that said, we did we have seen a rise in real rates. That's typically a negative for gold within the algorithms. Uh, the dollar is still hovering around this hundred level. If you look at the dollar index, that's a drag on gold. So I think that those are the two main factors. And also more, it's hard to quantify, but I do think gold, as has been U.S. Treasuries along with other sovereign bonds, have been a source of funds for those countries that have them and that are having to subsidize their economy and their consumers uh if they are a heavy energy importer.

SPEAKER_00 2:38

Right, right. So the investment case, you know, didn't break. The conditions it triggered for selling did, and governments maybe needed some liquidity. Gold was their most accessible asset. And that it's different than being wrong on gold, but we're gonna get deep into this because what's actually happening goes well beyond most coverage is telling you. But first, I got to get into this morning's numbers. And uh audience, stick with me. It's a lot of data, but it does set the context for everything. Now, the BC or the BEA rather this morning reported that PCE inflation up uh about 3.8% year over year, highest since 2023, nearly two full percentage points above the Fed's 2% target. I mean, core PCs stripping out food and energy came in at 3.3 year over year. Real disposable income fell for the first uh for the third consecutive month. And uh interesting, I mean, savings rate dropped 2.6%, lowest since 2022. Q1 GDP was revised down to 1.6 from that initial read of two. And and buried in this morning's report, according to the BEA, is corporate profits. I mean, they they rose just 0.9% in Q1, and that follows a 6% advance in quarter four. Peter, uh, what type of inflation is this? Because there's the inflation the Fed can fight, and then there's inflation it cannot touch. Which is this?

SPEAKER_01 3:53

Well, uh it's sort of a combination. You know, you have the conventional textbook, inflation is a combination of excessive fiscal spending monetized by their central bank. Uh yeah, that that's partly the case. We have excessive government spending with uh the uh budget deficit relative to GDP still around 6%, and obviously debt uh relative to the size of the economy uh in triple digits. Uh now, the Fed is not necessarily monetizing it like they were uh during COVID, but they're still buying T-bills, the balance sheet is still very fat. But you also have this major supply disruption, and you have higher energy prices and other commodity prices that flow through for a lot of different things. And I and I I like to tell economists that give me the conventional textbook saying, well, when this is not in anymore. And I might say, well, yeah, kind of it is, but also the average consumer, the average business doesn't care where the cost of doing business and the cost of living is going up. They just care that it's happening. And whether you want to call it inflation or not, we have an inflation shock. We had it in 2000, 2001, 2000, I'm sorry, 2021, 22. Obviously, uh that has continued, even with this pullback from the highs, but now it's obviously re-accelerating. And there is it's not a coincidence that inflation is the major pain point that has resulted in the consumer confidence index as measured by University in Michigan being at a record low.

SPEAKER_00 5:31

Right. And I mean, you know, that that headline this morning everyone's talking about that 3.8% inflation. Yeah, it's it feels like everyone's talking about it, but the more important line may be that real DPI down 0.5% and real spending up only 0.1. So consumers are still spending, but their income is shrinking. Is that the definition of late cycle pressure, or is the consumer actually cracking, maybe just absorbing another inflation hit?

SPEAKER_01 5:56

So real spending, inflation adjusted spending in the month of April was up just one tenth. Yeah. And something really important to understand here, too, is that when we have you have this energy supply shock, this commodity supply shock, companies don't immediately raise prices. It takes, call it two to three months for a rise in their material prices to flu through their cost of goods sold. Because the average cost customer, or to say the average company has stuff on the shelves that were procured before the war began. As that product runs down, as those shelves get refilled with current higher raw material prices, that's then when they respond, either through productivity gains, slower hiring, or higher prices. So this is something that is going to continue to unfold over the coming months and quarters if you don't see a sharp decline in oil prices and other commodity prices when this street reopens. Well, it depends on which part of the economy you're in. Uh certainly with respect to the data center build out, all you're seeing is prices go up. Price of construction, the price of steel, the price of aluminum, the price of copper, the price of memory chips, uh, the price of everything is going up within that ecosystem. And then other parts of the economy, you know, the cost of building a house, all your raw material prices have just gone up. Cost of labor is still very elevated. Uh obviously the cost to the consumer and everything that they're purchasing uh is going up. Now, will at some point we reach some demand destruction here? Maybe. And we we were reminded of that by Walmart last week. Walmart, in their conference call, said that at $4.50 per gallon of gasoline. Now they didn't give that price, but that's the average gallon according to AAA. They said for the first time since 2022, the average customer is buying less than 10 gallons of gasoline for their automobile. So we've reached a point, at least there, that consumers are put pulling back. Now we need that to sort of arrest the increase in gasoline prices if it's not going to happen via a barrel of oil. Um, but maybe we're beginning to reach that that point where uh the demand side starts to falter from here. Now, now again, this is this is a two-speed economy. We all know that. It's a two-speed stock market. It's either you're in the AI data center build-out or you're not. And in a way, in terms of the aggregate, you know, we talked about GDP, GDP and Q1 was up 1.6%. That was the revision from two. 150 basis points was due to data center build-outs. So that's the heavy concentration that we're seeing here. We are all in on this, for better or for worse, in terms of construction and data centers and the equity market performance that's benefiting from all that spend.

SPEAKER_00 9:17

Interesting. Uh I got to talk about the AI trade in a moment, but first the Fed, because this puts Kevin Walsh in a difficult position. He's day six on the job. He got sworn in on May 22nd. President Trump says rates come down very quickly, kind of the same day. Within 48 hours, Governor Waller publicly says no rate cuts. Governor Barr said no balance sheet reduction before Walsh chairs a single meeting. Now you said that wasn't a coincidence. What was it?

SPEAKER_01 9:44

Well, it was an interesting way for some of Kevin Warsh's new colleagues to sort of plant their flag and establish their opinion because they don't necessarily know what Kevin's going to think. Now, I'm sure behind the scenes there are conversations going on, and there will continue to be amongst the group heading into that June 16th and 17th meeting. But I do think that each of these central banks are not going to sort of seed their reputation on what Kevin may or may not do. So they're sort of establishing themselves. And those comments were followed up by Lisa Cook, Philip Jefferson, Austin Goolsby, who does not vote, Neil Kashkari, who does vote. Because that's what this comes down to. If you are a central banker right now, your credibility, your reputation is on the line based on this reacceleration of inflation. Now, I think Kevin is going to do a good job. I think Kevin is the right person for this job. I think Kevin is uniquely qualified because of his market experience working for Stan Druckenmiller. But he's still going to be subject to the circumstances around him. He's still going to be subject to the macro. And if I were him, I would say, okay, I can't do anything here. I'm not going to respond to this inflation shock because it's energy prices, until I know what the situation is with the strait. I can't cut rates because the market's just going to slap me across the head because they're still worried about inflation, among other things. Just look at the long end of the yield curve. So it's better to just sit and do nothing until these circumstances play itself out, particularly with Iran, particularly with the strait, where you can then observe how quickly the supply chains normalize, how quickly do oil prices recede, and to what extent. I think commodities are in a bull market even when this war ends. I don't think oil is going back to $65. I think 85 is the new 65, and something I've been saying for the last couple of months. And that's a reality that the market's going to have to uh adjust to too. Essentially, the stock market's been rallying since early April, believing we're about to get a deal. And here we are, two months later, hopefully about to get a deal. Hopefully, this time is real. Um, so it'll be interesting to see how the stock market actually responds on the reality of an actual deal.

SPEAKER_00 12:09

Yeah, yeah. And I mean, you had that public bet on Kelch, it was zero cuts in 2026. And, you know, according to the platform, that's trading around 64 cents. Are you still in it?

SPEAKER_01 12:18

So the bond market right now, the Fed funds futures pricing at about a 60% chance, give or take, of a hike. Uh, I think that's a bit premature. I mean, we need to hear from Kevin. Uh, and again, we'll we'll we'll hear from him in a couple weeks. Uh I I think circumstances as of right now, the Fed's not going to be cutting. Now, I don't necessarily think that they're going to hike, but the long end of the bond market has already hiked for them. The long end of the GGB market has already hiked for the BOJ. The long end of the European curve in Germany and France, and certainly uh in England have already hiked. So while we're hugely focused on what central bankers are going to do, the bond markets are saying, hey, we're not going to wait around, we're going to do it for you.

SPEAKER_00 13:03

I mean, you've raised the possibility that war shrinks the balance sheet currently above 6 trillion is kind of his primary tool. For viewers who don't track this daily, I mean, what why does that number matter?

SPEAKER_01 13:15

I think Kevin, and and one of the reasons why I always liked him was he was not on board with the decision of central bankers to play God over interest rates. And that's what they did. And in a very enhanced way, under Greenspan, Bernanke, and certainly Yellen and Powell carried that mantle. And Kevin is saying we need to reduce the footprint of the central bank in the economy. And a main way of doing that is shrinking the balance sheet. The risk, though, is balance sheet transmission mechanism comes through the financial markets. So I mentioned before he's going to be subject to circumstances. What happens if he says, you know what, I want to take this balance sheet down to call it $5 trillion. Let's clip another trillion off. Now, depending on what his colleagues say and and and the regulatory structure and the reserve base for banks and whether that's able, whether he was able to pull that off. But what happens if the SP 500 drops 25% on that reduction of the balance sheet? Will he be so bold? You know, one thing I wrote a couple months ago when he was appointed, I said, will the will the real Kevin Warsh please stand up? Is it going to be the one that's just going to do Trump's bidding and just cut rates? Or is he going to stick to what he truly believes and maybe cut rates if he feels that's prudent based on the data, or maybe have to hike? And what he will do with the balance sheet. Um, now I'm not so confident that he's gonna be able to get away with cutting the balance sheet too much. Yeah, I just think he's gonna be much more judicious and using it on the flip side. If we have a sovereign bond crisis and the tenure yield jumps to five and a half to six, I don't think necessarily he's gonna be so quick just to expand the Fed's balance sheet in a dramatic way. Now, that said maybe he does, because that's uh it'll be a different different circumstance, but I think he's just gonna be more circumspect about using Fed tools to manipulate every market in every downturn.

SPEAKER_00 15:17

Here's something worth flagging. Uh, according to Bloomberg, $120 billion is flowed into money market funds this month alone. Repo rates are trading below the bottom of the Fed's target range. Some strategists are calling this a liquidity boom. I mean, does that complicate the tightening story?

SPEAKER_01 15:35

You know, the money market, uh, the money that's going to money markets, to me, it's just money that continues to transition and search for yield. You know, when banks don't pay you much for your savings, you're going to put it into money markets. And now that we've had this recent uptick in bond yields, particularly on the short end, well, it pays even more to own a money market fund rather than a CD at a bank or uh in a savings account. So that's why I think we're seeing that increase in money market accounts. But yeah, I think this also, there's been regulatory changes, the supplementary leverage ratio has been eased. So banks have more liquidity to take on some more treasury inventory, make some deeper markets, which I think is a good thing. But maybe that gives uh Warsh license to shrink that balance sheet, being more confident that there is enough liquidity that we won't see a spike in overnight repo rates if he does so.

SPEAKER_00 16:30

I wanted to go to precious metals because obviously gold, you know, you you you know well it was above that $5,000. Conflict starts, inflation surges, gold kind of sold off a little bit. Uh we established that liquidity event, not a broken thesis, but I I want to kind of get past the price because the real gold story isn't about whether it's, you know, it goes back to 5,000. It's about what gold is actually is in the global monetary system right now and whether the role is changing. Uh just take us through that a little bit.

SPEAKER_01 16:58

Okay, so, you know, as you say, we know that central banks have been the big buyer of the past four years. But I think a good sort of encapsulation of what gold now means for the global financial system is there was an edit, not an editorial, there was an article in the Financial Times last week that talked about the growing market share, albeit off a very small base and still very low, the growing market share of the Chinese wan in trans global transactions, particularly in commodities, particularly oil, where the market share went from about 3%, now is at about 8%. Not and we're not going to a petro wan just yet, but it's less a petro dollar. And understand that a lot of these transactions taking place in one, and it could be also for agriculture products. It could be them buying uh soybeans from Argentina in one, it could be them buying corn from Brazil in one. And then those countries are taking that wan and probably buying stuff back from uh China. And India that doesn't that wants to buy Chinese oil and Russian oil but can't transact in dollars because of sanctions, they have no choice but to buy the wan. Well, the best asset to sort of settle a transaction where balance of payments in balance, instead of keeping money in wan or uh or something else, it the gold is now this neutral asset that immediately can be bought with that wand on the Shanghai gold exchange. So I think it's just sort of a microcosm of the importance that gold is having, both from a central bank reserve asset, from a payments of a balance of payments settlement currency, and that um I don't think enough people are really thinking about this sort of big picture shift.

SPEAKER_00 18:51

Yeah, yeah. And it's huge. I mean, for decades, countries sold commodities for dollars and recycled those dollars into US T bill, treasury bonds. You know, that kind of kept the long-term rate suppressed. Uh, and it helped finance the U.S. deficit. But I mean, according to the Federal Reserve data, foreign treasury holdings have gone from roughly 50% of the market a decade ago to about 30. So is that capital just going into gold?

SPEAKER_01 19:16

It's going into gold, it's probably going to other commodities. Um, it and and it's for for any domestic use that that countries uh might have. And it's interesting, interesting too, outside of Japan, which has its own dynamic with an overnight rate of 75 basis points and inflation higher than that, and uh a very domestic bond market, but still having its issues. You look at the UK guilt market, it's about a third foreign owned. The French oat bond market, about 50% foreign owned. The German uh bond market, very highly foreign owned. And those are also bond markets that have been under pressure. So also highlighting my point earlier that these bond markets are now a source of funds. And I think that that's a very noteworthy sort of call out to these governments that they can't just assume that foreigners are going to have to are gonna be buying their bonds and they're gonna have to rely more so on domestic savings, where there is some of these countries a dearth of it, particularly in the US.

SPEAKER_00 20:22

I mean, the the direct challenge, you know, this story has been told every cycle 20 years, the dollar is still roughly 80% of global transactions, treasury is still clear, gold sells off when things get stressed. What would actually tell you the gold thesis is wrong?

SPEAKER_01 20:39

That's a good question because being long gold, uh I have to think about that all the time. Yeah. About when does this trade end? When does the time to get off? Um, you know, from a portfolio management standpoint, you know, gold is an asset that everyone should own for the rest of their lives if you just look at the history of it, uh, because it's done nothing but go up and preserve people's purchasing power. But from a portfolio management standpoint, I think about that. I think about, hey, maybe Kevin Warsh is gonna be this hawk. Maybe he wants to really dramatically cut the balance sheet. Maybe he will even also raise the Fed funds rate. Maybe the dollar goes on this epic rally and sort of regains its presence. Maybe the US government gets religion and that budget deficit relative to GDP goes to 3%. Maybe uh you can't rule anything out. But these are the things that I think investors should be thinking about uh being long, uh at least in the short term. Now, I don't I think the the the reality of the situation is going to be very difficult for Kevin to get too hawkish because it can easily send the U.S. economy into recession. And politically speaking, I don't think he's gonna want to reside over that. Particularly, you know, Trump loves him today, but I don't think Trump's gonna be a big fan if the economy is in a recession. And he's not cutting interest rates. So, but those are the things that that that I'm thinking about from a portfolio management standpoint.

SPEAKER_00 22:07

And what about silver? I mean, mid-70s, also flat today a little bit, but you trimmed earlier this year on that vertical move. Where does silver stand in your framework right now?

SPEAKER_01 22:15

So we trimmed almost all of our silver in that move. But I I'd be happy I'd I want to get back in because that supply-demand deficit is still very much intact. Silver's down obviously dramatically from its peak with 35-40% from its highs. So it's had that correction. I'm just waiting for things to sort of settle out. And that period, as I talked about earlier, of consolidation digestion after that parabolic move needs to now create a sort of a technical base. But from a fundamental standpoint, I think the fundamentals are still very much positive for silver. I just need that technical setup to join that positive fundamental setup. And I'm not sure yet when we'll get it, but I think we're headed towards it.

SPEAKER_00 23:01

Okay. Good to hear. So that was a little bit of the bottom. I mean, so many people got scared of that volatility. Just got too frothy both metals.

SPEAKER_01 23:09

I I believe so. Now, can gold bottom at 4,000 instead of 4,400-ish? Maybe. Can gold be bottoming today because it it actually uh fell below its 200-day moving average? And the last time I checked, it regained it and actually went positive. So gold is about $90 off its lows. I don't know. I'm not sure. I'm not smart enough to know when the bottom is. But uh I think after this pullback we've seen that really started in February, um, you know, we're we're we're we're further along on this consolidation for sure.

SPEAKER_00 23:40

Yeah. Inside the US economy, there's kind of a specific set of signals that the market, according to many, has decided to kind of look past. And I think it's important to get to. I mean, you've been describing a K-shaped economy for months. Top of the K is that AI infrastructure, as you mentioned, that's you know, hyperscaler spending, uh, upper income consumers, kind of resilient. The bottom would be manufacturing, housing, lower and middle income households under pressure. And again, according to that more this morning's data from the BEA, disposable income has fallen three straight months. The savings rate 2.6. Uh, CEO confidence dropped to 47 in Q2. Um, according to Walmart's own earnings. I mean, you were just talking about it there. That's that's pretty wild to hear the CEO basically say plainly. Um, what doesn't the market care about here?

SPEAKER_01 24:31

Well, I I think the market doesn't care about that divergence. Yeah, the market is loving the excitement and the economic contribution from the data center build out. That's what's dominating. The market could care less about the parts of the economy that are in a recession, and that's because we know what dominates. You know, half the SP now is touching AI data centers in some fashion. Almost 18% of the SP 500 is now semiconductors. We've never gotten to that level before, I believe. Uh so that is what's dominating. So it's the the needed sustainability of that is what's sustaining is what's keeping things afloat. Because as I said earlier, we're all in on this. So the bet has to pay off. But it's not a question of if, it's a question of when the level of spend slows down because Oracle can't make it spending 75% of their revenue on CapEx perpetually. Uh Meta is spending, can't keep going, spending half their revenue on CapEx. So at some point, these companies are gonna rate it in because the compute power is on a more sustainable basis, and then they'll have maintenance capex thereafter, which will be much more elevated than where it was before. So this is going to slow down at some point, and the real benefits of Gen AI are gonna accrue to the rest of us, and they've already started to. So when that happens, will there be you know cushions on the other side? Will we see an improvement in manufacturing? Will inflation uh abate that will allow uh lower to middle income consumers, you know, breathe a sigh of relief? I'm not sure. Um and and that's what we're gonna have to see. Because right now it's it's like I said, it's all in, and there are no shock absorbers to that.

SPEAKER_00 26:27

Right, right. To your point, Peter, I mean, uh according to Pitch just this morning, private credit default rates have recently hit six percent, the highest they've ever recorded, you know, not tech companies, industrials, manufacturers, consumer products. I mean, for viewers, yeah, healthcare. Um, for viewers who don't live in this market, I mean, private credit is is obviously lending by investment funds, not banks. It grew enormously post 2008 at zero rates. Uh, a significant amount of retail money has been directed into that. Uh, how serious is that 6% figure?

SPEAKER_01 27:01

Well, it it's not serious yet, but it's the trajectory that is worth noting because it is at a multi-year high. Now, Fitch has only started uh measuring default rates within this area of private credit since uh 2024, so it's a very small universe, but we have been seeing this step up uh in that level. So it's important from that perspective, but also the dynamic of private credit wanting to marry retail has sort of you know broken up to an extent. And that net um inflow level has sort of balanced out between inflows and redemptions. So that means that private credit has to be more judicious with lending out uh money because of the less flows that are coming in. A lot of that money gets lent to private equity deals, so private equity has to maybe source other areas of financing. And for businesses generally that are getting direct loans from private credit as opposed to a private equity finance sponsored deal, um, well, maybe their cost of capital goes up as a result. So now the last month uh after private credit was talked about every day, it's sort of fallen back behind uh the topic of discussion being semiconductors, but uh it's still something that people should focus on.

SPEAKER_00 28:22

Yeah, I mean the the the argument against the stress is is kind of concentrated in sectors that we've already been impaired before any of this. Is this a pre-existing problem rather than something new breaking?

SPEAKER_01 28:35

Uh I think private credit was a classic case of too much money chasing not enough good loans. Yeah. And you're beginning to see some of those not enough good loans sort of rise to the surface. You know, there's certainly stress within this whole private equity credit community in the sense of uh of clogging up of a lot of companies that that aren't being monetizable, and that you have call it some endowments that committed to X amount of private equity investments on the assumption that over that time frame they were going to get distributions that they would then reinvest in their future commitments. Well, those distributions have slowed to a crawl, and they're now having to come up with new fresh capital. So I I see a further clogging up of this private equity, private credit sort of ecosystem that um that that is that that feasted for many years on cheap money, and of course, money is is is not so cheap anymore.

SPEAKER_00 29:37

Uh I want to turn to the AI trade because there's an angle on it that you know almost nobody's covering, and it connects back to commodities. And you spoke about this a little bit before. We'll kind of get back to it because according to to YWin, one of the largest NVIDIA server manufacturers, data center component shortages will extend it to 2027-2028. I mean, I think Microne recently crossed that trillion dollar market cap after a 19 single-day surge. I mean, uh buried into that report this morning, too, from the BEA, computer software and accessory prices rose 5% in April. Now, there was a study co-authored by former Fed chair or governor Stephen Miran in that core category kind of made, and and this is his word, an unprecedented contribution to the core inflation from November through to March. So, I mean, the AI build out is now showing up in the inflation data. You've been making the case that AI is obviously a physical story. We got land, copper, power, memory, not just software. Just remind people again why that matters.

SPEAKER_01 30:40

Well, on the memory side, uh, HPQ or HP reported earnings uh yesterday. And uh the stock, well, this morning was down. I have to see what it's done over the last couple hours. Even though the top line was fine, bottom line was not because of higher component costs. And the CEO even mentioned it's not just memory and other component costs, it's you know, the flow through of high oil prices and and and what that flows through downstream. Uh and you know, the the if you if you go through a lot of the hyperscaler earnings calls, and some of them raised their capex numbers, part of that capex increase was because of the higher cost of spend in terms of that that um uh raw material prices and also memory. And uh and that's flowing through into retail. I mean, Dell and HP, they're not just gonna sit there and eat all this. They're gonna do what they can to raise uh prices to retail. So I mean, and that's the thing with with with that part of the um you know of the goods sector is you know, for decades, we were only used to falling uh TV prices, falling PC prices, uh, falling iPhone prices. Well, that that that is over for now. Eventually we'll resume the downward trend. But for now, it's either companies are gonna have to eat the higher prices or they're gonna pass it on to retail. Even Apple is probably one of the greatest logistical sourcing companies in the world. And Tim Cook talked about on their last call that in the coming quarters uh the higher memory and component prices are gonna be more pronounced.

SPEAKER_00 32:22

Yeah, and I think CDW's earnings commentary too. I mean, customers are pulling forward memory orders on price fears, shortage concerns. If the conflict ends and those orders normalize or say they get canceled, uh what does that do to the uh AI trade? I mean, is this a 2027 story?

SPEAKER_01 32:39

Well, you bring up something very important, what CDW said. And for those that don't know CDW, they have tens of thousands of customers selling into commercial, government, education, and health in a variety of different things. Hardware, software, peripherals, so many different things. And it's one of my go-to companies when I'm looking for uh good information. And they talked about a pull forward going on. And I think you're seeing a pull forward throughout the economy, not just anything related to um hardware, um, but everything, anything industrial, because companies are trying to get ahead of price increases and they're trying to get ahead of threats of supply uh shortages and disruptions. And you have to believe that there's a lot of double and triple triple ordering that's going on because of this. Now, we of course won't know and uh until this war ends, and you see to your point about whether we'll get order cancellations as things normalize, but I have to believe that's going on. I also have to believe that the inflection higher in manufacturing PMIs around the world over the past couple months has a lot to do with that pull forward of ordering, of a right of a variety of different things.

SPEAKER_00 33:52

I mean, you've argued China emerges from this conflict, you know, stronger. They they've reportedly offering AI models at roughly 75% below US pricing globally. I mean, what what does the market understand that? I mean, what what US companies are kind of competing against in the next five years?

SPEAKER_01 34:08

Yeah, I mean, DeepSeak in particular is offering their models at sort of that discount relative to US providers, uh, which is dramatic. You also have, you know, we took we think memory uh chip production is just Micron Sand disk and SK Heinex, but China's developing their own memory uh and storage uh semiconductor industry. Now, when that matters for global supply and demand, I don't know, but it's coming. And we saw Huawei talk about advancements that they're making on the chip side, even though it's still going to play out over a multi-year time horizon. But you know, for the first time that I know, outside of maybe Japan in the 80s, US tech is facing their most formidable competitor in China. And we are in part responsible for that because we encouraged China to develop their own uh technology base because we deprived them of a lot of our key technology. But whether one agreed with that approach or not, we are where we are, and China is very far advanced in developing their own. And in some areas, they've gone past us. And EVs, they've driven, no pun intended, well ahead of us. Automation, robotics, and also the cost of electricity is half of what it takes to make something in the US. Um, that is also very notable in terms of their sort of cost of production and what they're going to be able to sell things on the global stage in competing with us and other companies around the world.

SPEAKER_00 35:43

Peter, let's segue, I mean, where we actually kind of put our money in this environment because uh again, according to Goldman Sachs Trading Desk, short interest in consumer staples, healthcare utilities, it's near multi-decade highs. The median short interest in healthcare is at a 30-year high. According to the Bank of America, fund managers are the most overweight equities since early 2022, approaching their internal sell signal. Now, the ultra-wealthy have sold over a billion dollars of stock in recent weeks, and you've been buying staples. You're on the other side of a very crowded trade. Uh, just make the case for us.

SPEAKER_01 36:17

Yeah, thank you, Jeremy. Uh, because that's been my own personal pain trade has been long uh consumer staple stocks like those in food and products. Uh, but I think right now, while it's probably the most boring area of the market, it's certainly the most hated. And I think there's potentially an inflection here, uh, particularly if the war ends and we get some relief on package on uh polyethylene, uh where ethylene prices generally and then and polyethylene and that ends up in packaging and resonance and and and so on, that a lot of these uh food companies are relying on. And aluminum prices, whether you're talking about uh Coca-Cola and Pepsi and Heinz, uh Kraft Heinz and Reynolds Consumer Products, Kimberly Clark, all stocks that we own. And these companies aren't just sitting still. They're adjusting to uh the focus on health and wellness, on protein, uh, on getting their cost structure right. And uh I think that this is one of the more compelling areas, but certainly the probably the most hated area of the market, and that we really like paying very nice dividend yields, very low valuations. And I know there's I I know selling ketchup and cream cheese is just not as exciting as high bandwidth memory chips, but uh from a stock perspective, we find them pretty attractive.

SPEAKER_00 37:44

Yeah, I mean, you you just named names there. I mean, you know, Kraft Heinz, what, 7% dividend yield, uh, mosaic in fertilizer. And, you know, I'm looking at some of those and I'm thinking, is the AGE, is the agriculture complex kind of the next leg of the commodity bull here? I mean, for somebody that's never thought about fertilizer as a macro trade, kind of talk about that a little bit.

SPEAKER_01 38:05

So I think it is. I think last year we had this precious metal industrial bull market that took off. Uh, it obviously spread to energy with the war, and uh and I think ag is next. Now we know with respect to nitrogen, uh, particularly urea, that is sort of um uh blocked to a large extent coming out of the strait, at least about a third of the world's um nitrogen supplies, uh, but also sulfur sulfur, which is used to make sulfuric acid and ammonia, where those are two key import uh uh inputs to making phosphate. And mosaic, as you mentioned, stocks that were long, uh phosphate prices have not gone up to the same extent at which sulfuric acid and ammonia prices have gone up. So they're cutting back on the production of phosphate. Uh, you have to assume that with the big jump in nitrogen prices, that farmers are gonna use less of it. So we're getting less fertilizer into the soil, and eventually that will lead to higher crop prices. Now, that may not be reflected until the back half of the summer, and as you enter harvest season, uh call it October, November. But at some point I do think you're gonna see a price response in the big row crops like corn, soybean, and wheat, that the farmer desperately needs to be able to afford the big rise in fertilizer prices. Unfortunately, those of us that eat every day, we're not gonna be too happy about a big jump in crop prices because that's gonna flow through into general food prices. Uh, so that's the dynamic I think that you're in. But I do think there's an ag bull market ahead of us, both in terms of crop prices and a further rise in fertilizer prices that will benefit the fertilizer producers.

SPEAKER_00 39:53

Yeah, it'd be interesting to see how that hits the pockets of those at home, uh, as you mentioned. I mean, uh getting back to gold for our Kitko audience, I mean, you hold it through volatility. Uh what is the specific catalyst that that takes it back through the prior highs? And I and I guess part of the other question is is there a yield level that works against gold, even with everything else in your favor?

SPEAKER_01 40:16

Well, the the thing that I want that I'm really interested in seeing over the next couple months, probably not going to be out until maybe July, August, is I want to see the pace at which central banks bought gold in Q2. Q1, they continued to buy, but we know two months out of the three were where we didn't have a war. So when you saw news about Turkey monetizing some of their gold holdings, uh there's been chatter that Russia maybe has even trimmed some to finance their war. Uh, I want to see what the pace of transactions took place with respect to central banks. Was gold truly a source of funds for some? Was it just talk and negligible? That's what I want to see next because we know central banks have been that main bid. Uh, I also want to see whether this this recent rise in real rates continues. Uh, I think that's going to be key. And when the war ends and the strait reopens, does the dollar resume its downward trend? Because I have to believe that, and this really started last year with tariffs, countries around the world realized that they need to diversify both their capital flows but also their trade flows. And does that diversification continue on and maybe get enhanced when the war ends and supply chains begin to normalize?

SPEAKER_00 41:40

Yeah. So I mean, if Q2 buying slows, does that actually break the gold thesis a little bit, or or would you see it as a temporary liquidity stress from the energy importers needing cash?

SPEAKER_01 41:50

Yeah, I see it more as a temporary liquidity thing. I think the pullback in gold has been more of a liquidity thing rather than a fundamental thing. Now, again, higher real rates, higher dollars, negative for gold, but I see the pullback more so being uh a liquidity source of funds thing rather than a big fundamental thing because central banks are still obviously uh buying it. We'll just I'm just curious to see to what extent today. And then when the war ends and they get some relief on those energy imports, do then they resume uh those gold purchases?

SPEAKER_00 42:25

I gotta ask you quickly. I mean, our time always runs out too fast, but you reduce your Japan equity position after years of being kind of right on that trade. Uh is the thesis done?

SPEAKER_01 42:35

I don't think it's done, but I I I did start to think about the competition from an industrial manufacturing perspective from China. Um