This Is Backdoor Monetization” Gold’s Next Move | Michael Howell

追加: 2026-05-21

[00:00:00]Every 10point increase in the move index leads to about 30 to 40 billion of buybacks um as a result. So they're very very active in keeping the lid on this.

[00:00:09]The gold price has gone up 12 times at least since then. Okay. What has the S&P done? It's gone up six times. So the S&P is continually uh underperforming and that's what's the future is going to hold too.

[00:00:25]Hello and welcome back to the Deutsche Go Messa. Welcome back to Soore Financially. My name is Kai Hoffman. I'm the Edj Mining guy over on X and of course your host of the conference but also of SORE financially. Really appreciate you joining us and I'm joined here by Michael Howell, the king of liquidity. He's the brains behind Capital Wars. Really, really excited to have you here in Frankfurt. Michael, thanks so much for joining us.

[00:00:46]>> Great pleasure, Kai. It's been a great successful conference. Uh all going well, lots of companies, lots of insight and goals going up.

[00:00:53]>> But it was also important lots of investors. Like companies are easy, but we want the investors here, right?

[00:00:58]Absolutely. No, appreciate the kind words, Michael. Um, we need to talk about what's happening in the markets actually just the last 24 hours because we've seen bond yields spike dramatically. Gold and silver crash. Um, crashes may be a bit extreme, but we've seen a correction of 10%.

[00:01:12]>> Intraday I call that a crash. Um, but let's maybe with the bond market. Um, yields spiked tremendously. There's rumors of Japan and other foreign selling their their bonds and treasuries. Curious like can you put that into perspective for us? What did we see yesterday?

[00:01:26]Well, I think there's a number of things going on. I mean, one is correct to you're correct to say that bonds are selling off and bonds are are clearly in a a problem area with inflation picking up and that's one of the concerns. And one of the one of the points that I brought out in my talk yesterday was that um if you look at what the US Treasury and the Federal Reserve are doing, they're they're struggling hard to keep the bond markets under control.

[00:01:48]And this is critical for the US authorities because they've got to sell a lot of debt. I mean, look at just last week, they had to sell $600 billion of US debt in one week. I mean, these are astonishing amounts of money. Um, and so they need low volatility and they need hopefully low yields. It's kind of difficult to get. Um, and so what the Federal Reserve has been doing has been putting liquidity into the markets and the Treasury trying to cap uh volatility through buybacks. Now the problem is that if you're manipulating the market, you're pushing volatility into different areas. Uh volatility never dies. It just basically transforms in different ways.

[00:02:26]And I think the risk is that you're creating volatility in the forex market simultaneously. And that I think is what we're beginning to see. So gold is really a bellweather of that. So what I would say is that uh you know the the authorities may be trying to uh manage the debt markets against a background of uh rising inflation of uncertainty in the uh in geopolitics rising oil prices.

[00:02:47]It's kind of difficult for them to pull that one off. So you're bound to see more volatility and that's what we've got. Is it a buying or is it a selling opportunity? It's a buying opportunity.

[00:02:56]If you can get gold and silver at lower prices, great. Then go for it. Uh I think the other thing you've got to bring into account is what China is doing. And China is very clearly at the moment taking its foot off the gas pedal. And China's been a big driver uh of gold prices in the last few years for sure.

[00:03:12]>> Yeah. Well, they've been soaking up actually a lot of the gold even in March when it dipped when the war broke out as well. So that was an interesting observation. Um but you were mentioning like they're struggling to maintain balance in the bond market. I want to dissect that part, the struggle part.

[00:03:25]Like how is that visible? Um does the Fed have to step in? I'm just c looking for some examples our audience can hang their head on. And what what does the struggle look like?

[00:03:33]>> Well, I think the fact is the Fed has already stepped in and the Fed has stepped in in large size. Uh you've only got to look at what's been happening in the markets really since uh late last year. Uh when I mean one other bell weather or early signal attention is to look at the sofa spreads in the repo markets. Now as a step back which I think one needs to take the repo markets are really the central financing mechanism in the whole system. Now uh this is where money is created. uh this is the source of liquidity has been really since the global financial crisis something like uh 80% all lending now is collateralbased and that means that repo is really important now you can see those tensions in the repo markets with sofa spreads uh spiking in uh from really late October and from that point uh through until about 2 or 3 weeks ago the Federal Reserve uh put in about $600 billion of new liquidity that's a sizable amount I I keep quoting you in all my interviews lately cuz nobody's got that on their radar screen.

[00:04:34]>> It it's a sizable amount and that's really come in two forms. It's come through first of all their reserve management purchases. Uh these are a new invention, a new acronym that Fed came up with uh in late October. Uh and this was another form of QE. They denied it was QE, but clearly it is QE. And they're just basically buying debt. Uh they're doing it through the bill markets, but they're injecting funds into the money markets as a result. And that's been sizable. has accounted for about half that increase of 600. The other is by changing bank regulations and what they've done is they've reduced the uh the need for banks to hold liquidity and so the banks have freed up about another 250 billion of liquidity.

[00:05:13]So you add all these bits together and it totals about 600 billion. It's a large amount and that's why sofa spreads have come down. How does that compare the 600 billion because personally I lost all grip of numbers like they're just fairy dust you know but how does that compare to maybe QE during the COVID crisis or something like can you compare give us some some comparables there >> well I think the the key thing to watch is um uh is to look at bank reserves and bank reserves are now just above $3 trillion so you've got to put that 600 billion in that context so basically around um uh October of last year we went down to about 2.7 uh we spiked up at about 3.3 uh trillion uh a couple of weeks ago and it's now starting to come down a little bit again. But the main benchmark is to say that has to hold above 3 trillion uh for stability in the repo markets to to continue. Uh it probably has to climb over time because there's bound to be some nominal increase in that figure. So you're looking at that as a benchmark and you can get that information every week through the H4.1 which the Federal Reserve releases. That's a their press release and the data is in there.

[00:06:17]>> Fantastic. Yeah, I know it's it's very tricky to follow. That's why I tremendously appreciate your your insights cuz that $600 billion number never shows up anywhere. Nobody does the math. Nobody wants to talk about it probably. Is is it >> how do we get more transparency like maybe is the question.

[00:06:31]>> Well, you have to you have to dive into the weeds and I suppose that's that's what I paid to do. So, there's that element. The other thing which is also another uh factor to bring out is what the Treasury is doing in terms of buybacks. Now, um the focus clearly on monetary policy uh historically has been Fed funds rate. Um there's a big pantomime every time the FOMC meets and decides what Fed funds rate is going to be or not going to be. Uh that is a pantomime. It's basically orchestrated by the Federal Reserve. Uh if you're a journalist who asks the wrong question, you're not invited to the next uh press meeting. So these things have become very very political. And one of the things that new new chair Walsh wants to do is to downsize that whole episode, which I think is correct. And the reason for that is what do interest rates really mean in the current context? I'm not sure. Uh and the reason I'm not sure is that the federal government is now the big data in the world uh or in the US economy and for the world for that matter. And every time that interest rates drop, what you get is a smaller interest bill for the US Treasury. That is an income transfer, a smaller income transfer to the private sector. So if they cut interest rates, is that really a stimulus? Probably not because the private sector's income is now going down. And this is the how the world has changed. So interest rates don't mean what they used to mean. What really matters is the volatility in the bond market. And this is what the Treasury is starting to do. It's starting to cap that volatility through what are called buybacks. They go into the market, they buy what are called off therun bonds, which are stale, illlquid bonds, and they replace them with shiny new bonds.

[00:08:12]So, it's like, you know, selling your car, uh, your secondhand car, and buying a new car, and people prefer the new car, not the old car. And that's basically how the market works as well.

[00:08:22]And so, what you have is the Treasury deliberately attempting to keep volatility down. Why is that so crucial?

[00:08:28]It's crucial for two reasons. Number one is that it's the main source of liquidity creation. If the uh if volatility in the bond markets is high, collateral is moving all over the place and the dealer banks won't lend very much on that collateral. So the collateral multiplier shrinks, liquidity creation shrinks and that adversely affects gold uh in the longer run. The other reason is that the hedge funds are big big buyers of treasuries right now and they do something called a basis trade where they buy cash bonds and they short the futures. that particular trade is very dependent on low volatility. If you get high volatility, they will close that trade. Yields will spike and that will be a cascade. The bond markets will sell off dramatically and that's what we want to avoid. So the treasury is basically active and what we've estimated is this year every 10point increase in the move index and you can get the move index. It's a daily daily print. uh every 10point increase in the move index leads to about 30 to 40 billion of buybacks um as a result. So they're very very active in keeping the lid on this. It's it's fascinating. It's it's a market I've understand very little about. I fully admit that. And but but it's fascinating when you talk about like low volatile or low liquidity bonds like why why does that matter?

[00:09:44]Like why do you need trading in those in those um instruments to to make them attractive and then replace them replace them with new shiny ones? like help me understand that part like why is the low liquidity >> well okay there let me let me go back so if you're um let's go back to the repo market so what the repo markets basically do is let's say you've got a 100 million of treasuries uh you can then borrow against that so you place that as collateral you you vest it with a uh a dealer bank and the dealer bank will lend on that uh 100 million now they could lend you a h 100red million but they typically haircut that collateral and they haircut it according to the volatility of the underlying collateral. So if you get very volatile bond markets, then they're going to give you a bigger haircut and the amount you can borrow shrinks and therefore what's called the collateral multiplier comes down. So you can create less liquidity per unit of collateral. So low volatile environments are very good. If you have treasury bills as collateral, they're not very volatile. So one of the things that's going on right now is the treasury is issuing lots of shortdated bills. Now the comment the corollery to that which is also not spoken about which is a key point for gold investors is that one of the reasons they're invent they they they're issuing shortdated debt is that not only is it low volatility but also the banks love it. Okay the banks you got to remember are facing a problem where they get rising depos deposits because of the big fiscal deficit. So America's got this whopping deficit 8% of GDP this year at least. Okay, big number. So what does it mean in practice? It means that people's bank accounts are going up as the government is spending. Now if you're a bank, you've got to balance your assets and liabilities. So what you need is effectively an asset on the other side which is of similar duration to a bank deposit. Answer, a treasury bill. So they are big big buyers of treasury bills. Now what does that mean in practice for a gold investor? It means that what they're doing is monetization.

[00:11:44]This is backdoor monetization and the fact is that the more that you monetize, the greater the risk of higher inflation and that is clearly why gold goes up in the long term. No, fantastic. I really appreciate that explanation cuz sometimes I feel like I'm 5 years old having these discussions. So really really fun to keep up and catch up here as well. Um let let's talk about the bond vigilantes. I I brought that term back in an earlier interview cuz I'm curious are they back cuz with the action yesterday in the market and who are they this time around?

[00:12:13]>> Well, I think that's an interesting point. I mean, who are the bomb vigilantes? I think they've changed. Uh they're now really the hedge funds. Uh as I said, the hedge funds have been big marginal buyers. Uh they are sensitive to volatility uh in the markets. That's the main thing. And so, it's not so much the yield that matters too much. It's much more the volatility in the market.

[00:12:32]uh they can play the spread but what they don't like is a very uncertain environment because their leverage will have to contract in a high volatile state. Uh they are the vigilantes. Um I mean there are clearly others uh such as the longerterm funds, pension funds and insurance funds.

[00:12:48]>> I was just going to ask about the sovereigns as well. Where do you place them these days?

[00:12:51]>> Yeah, I think that the sovereigns tend to buy very much at the shorter end of the market. uh and the sovereigns as far as we know are generally retreating uh out of US treasuries for sure. Uh but they they they tend to buy they're tending to buy at much shorter durations. The people who are buying the longer or mid-duration bonds tend to be much more these longerterm institutions.

[00:13:13]Traditionally that was pension funds but with aging demographics now you're finding that the demand for pension funds is actually shrinking. They're they're moving much more towards the shorter bond. Um, so it's really life insurance companies and hedge funds were the big buyers.

[00:13:28]>> Well, you said 600 billion had to be placed just last week here. Like, so who bought it? Was it the hedge funds? Was it the insurance? The pension funds?

[00:13:35]Like you keep getting their money?

[00:13:36]>> Well, the answer is that the a large part of that is actually bill issuance.

[00:13:40]And one of the reasons that you've got this very high gross u uh gross auction size. In other words, what the 600 billion is the larger part is a three-month treasury bill that's continually rolling over. So if you if you'll keep this is the the rollover risk that the Treasury is facing is that they're having to roll these Treasury bills in an environment of uncertainty where interest rates who knows where they go. So if the Federal Reserve decides it's going to rather than cutting rates is going to hike rates then the co the interest bill for the Treasury immediately jumps and this is the big concern they've got. So the more that you do um financing at the front end of the market, the easier it may be to get away, but the cost is variable and uncertain and it can easily bloat your uh your your deficit out dramatically and the whole thing will just grow exponentially. This is the risk. Um how is the Fed involved in all of this right now? Like we talked about like the nonQE QE part and they have been buying bills. Why did they have to step in? Okay.

[00:14:42]>> Well, the the reason being is that uh what you've got is you've got shortages in the money markets. And if you get imbalances between collateral and liquidity, uh what you find is you get tensions and those tensions are expressed in rising repo rates. Now, if you get rising repo rates uh relative to Fed funds, that's indicating there's a tension where the Federal Reserve is losing control of interest rate setting.

[00:15:05]The market is taking back control and the market wants higher interest rates.

[00:15:08]It's saying there's a there's either a shortage of liquidity or there's a shortage of good quality collateral. And that's an imbalance the Federal Reserve has to has to correct.

[00:15:17]>> Is that yield to curve control? Is that the YCC that everybody talks about? But >> well, I I I hesitate to say it's yield curve control. It's yield volatility control >> which is if you like the delta of yield curve control. So it's one step beyond.

[00:15:32]Uh but I think that's where you've got to focus. So it's not so much I think it would be very very difficult for the authorities to really control yields.

[00:15:39]Okay, the market controls yields. What they've got much more ability of doing is controlling the volatility in the in the markets and that's what they're desperately struggling to do. I mean they're they're trying to keep interest rates down as much as they can but that that's a that's a big battle.

[00:15:53]>> Yeah. Just the last 10 days here, has anything broken? Has anything changed? I coming back to what we saw yesterday in the markets. I'm just curious, has the system changed at all? like anything moving forward that you're concerned about?

[00:16:05]>> No, I think I think there there are two things to say. I mean, one is the the realization that the US Federal Reserve and the Treasury are very active in the markets. You can either take as a reassuring sign that the authorities are onto it or a worrying sign that the markets need this support. I take it as a worrying sign because these are showing that cracks are breaking. The other big change in the last 10 days has been China has turned off the liquidity tap very sharply. Now this is a a a critical point. Um my view is that China has to run uh a big liquidity surplus.

[00:16:38]They have to start putting a lot of liquidity into money markets because their debt problem is as big if not worse than America's. Okay. China has a historic debt problem. We can argue that America has a future debt problem. Okay, maybe that's the difference. But China's historic debt problem has to be uh has to be uh devalued. They can't run this economy with a big debt burden. So they need to devalue debt in the same way that Japan devalued debt or America devalued its debt after the GFC etc. There's a long history of governments devaluing debt uh by letting their trashing their currencies and China has to do the same thing. Now what China is doing is devaluing the yuan internally.

[00:17:18]Okay, they've got capital controls which helps them do that. And if you look at the gold price, the gold price has been driven fundamentally by PBOC, China's people's banks money printing. And that I think is the main dynamic uh certainly over the last two or three years. Look at a chart between PBOC liquidity injections and the gold prices. It's almost one to one. So they've been driving this.

[00:17:39]>> What you've seen in the last 10 days is the POC has hit the brakes. Why? I'm not sure. Is it to do with the Trump Z summit? It could be. It could be geopolitics, but they've basically halted. Until they restart, maybe gold is under a bit of a cloud, but they will restart because they have to and they have to get gold behind their monetary system. And that's the only choice China has.

[00:17:59]>> Yeah. I remember you showing us a chart exactly like Chinese liquidity gold price overlaying it's identical.

[00:18:05]>> Yeah.

[00:18:06]>> Almost identical.

[00:18:06]>> Exactly. Right. Exactly. No. Fantastic.

[00:18:08]Um so you in your talk the title of course what makes gold go up? I think paraphrase hopefully I'm not phrasing too much. Exactly.

[00:18:16]>> But um if if the investors like if they were to leave the room and really simp in really simple terms like what do you want them to take away? Like what should they be paying attention to? Well, the the main fact is that we're in a world of excessive debt. Okay, that debt is uh is going to grow more in the future because of aging demographics. Uh is there any way of stopping that? Unlikely for the simple reason that this is mandatory spending on pensions and social welfare that governments have committed to. No one is in the business of saying we're going to stop that yet.

[00:18:47]Uh it will stop at some stage, but we're talking 10, 20, 30 years in the future in my view. and you've got defense spending uh that's going to escalate. So essentially debt is climbing. The fact is that in modern economies debt is fundamental to the credit system and to refinance debt you need liquidity. And so debt and liquidity are in this nexus.

[00:19:08]They're moving together. What's driving the gold price is liquidity. So liquidity is fungeible. The more liquidity you put into the system, the higher the gold price goes. So the bottom line is more debt equals higher gold price. You've seen that in the last 25 years. US federal debt has increased in size by a whopping 10 times, right, since year 2000. Uh the gold price has gone up 12 times at least since then.

[00:19:32]Okay. What has the S&P done? It's gone up six times. So the S&P is continually uh underperforming and that's what's the future is going to hold too.

[00:19:41]>> I finally found my segue to talk about the dollar real quick. I finally found the opening here because the dollars went up went up yesterday. The Dixie went up of course the dollar versus the other currencies. Um why is that? Why is the dollar still relative strong given just what we discussed here?

[00:19:56]>> Because if you've got a if you've got a debt crisis or an emerging debt crisis, people are borrowing mostly in dollars.

[00:20:01]And one of the ways that what what happens in a debt crisis, you got to pay your debt off. So you demand dollars.

[00:20:06]And that's the strength that America has. Uh you know, people talk about the fact that you know the the dollar is there for geopolitical reasons or because America has battleships. That's not really the reason. The reason that the dollar is dominant is because so many people borrow and lend in dollars.

[00:20:20]That's what banks do. It's it's the unit of account in the world economy. Until that changes, uh the dollar is going to be dominant.

[00:20:27]>> Has the US strengthened the position of the US dollar in the last 6 months?

[00:20:32]>> Uh I think the answer to that is probably yes >> for the simple reason that what the US has done is rolling out stable coin and I think stable coin are a big big threat to international monetary system other international monetary systems. The Chinese have been really spooked by this which is why they put big controls on crypto. uh cryptos banned in China uh for the simple reason that that was a way out into US stable coin and Europe is really scratching its head. The Europe the ECB just doesn't know what to do. Uh and it's a big threat to the European monetary system in the same way as a threat to the Turkish monetary system or the African C.

[00:21:04]>> Can you explain that like why is it a threat? Just just we got like four minutes left or so but just explain a the concept of the stable coin because it's going to be a US bondbacked um stable coin but why is it so dramatically different? Because my big question and I'll ask you is like the the big problem of understanding is where's the additional liquidity supposed to come from to buy these stable coins?

[00:21:23]>> Well, it comes out of existing currency areas. That that's the point. So if I'm uh if I'm in the say I'm in the UK and I I want to put my money somewhere where it's first of all easy to transact and secondly where there is probably some anonymity against the UK authorities.

[00:21:41]I'm going to say some then I'll choose a US stable coin. Um but if you're in Turkey that's probably even clearer.

[00:21:48]>> Sorry to jump in again just for it's it's really purely about the transaction.

[00:21:52]>> Yeah I think it's ease of transaction.

[00:21:54]>> It ease it's an ease of transaction.

[00:21:57]There's some anonymity. Okay. Uh and thirdly it's a secure asset because it's backed by US treasuries. So what's not to like? So if you're in Turkey where you've got a very high inflation rate or if you're in an African country like Nigeria it seems an obvious thing to hold a US stable coin. Now if more and more of your local currency deposits are going to leak out uh from Turkish lera let's say into US dollar stable coin then the Turkish authorities are losing control of their monetary system. Now expand that into the euro area and say what happens if people get concerned in the euro area uh that Germany has to bail out the periphery again. Okay. Uh so you're going to issue a lot more debt. Uh there's underlying inflation within the system which is emerging. So why not then move into a US dollar stable coin uh where you've got more security or at least you're diversifying. And the additional attraction of this is that it's much easier now to open up a wallet or to open a wallet holding a stable coin that open a dollar bank account because the checks are actually less and less ownorous. Um so people are going to do that. So they're going to go to these uh uh they're going to go to these stable coin wallets and use those. The other point which I think is a critical one is that you're familiar with Gresian's law in monetary economics about uh bad money driving out good. Well, what's happening now in the architecture is you've got the reverse of Gresian's law where good money is driving out bad. And the reason is that the architecture of these payment systems embeds the US dollar.

[00:23:27]Okay. And so what's happening is that these uh these particular payment systems are establishing or underscoring the role of the US dollar. So if I want to, you know, buy goods internationally through a through a payment system, I've got a choice. I can use dollars. I can probably use dollar stablecoin, but I can't use Turkish lera. I can't use maybe I can't use British pounds. I don't know. But these things are becoming institutionalized and the rails, the payment rails are dominating uh or dominating the role pushing the dominant role of the dollar I should say. You know, all I heard from this, like really simple, is the EU needs the Euro bonds to compete with the US.

[00:24:06]>> Exactly. But the problem is what what's the what's the backing for the Euro bonds? I mean, this is this >> Germany.

[00:24:12]>> Yeah. Exactly. This is the problem.

[00:24:14]Germany can't shoulder the burden of the EU on its own.

[00:24:17]>> No. And I struggle with that big time because we're actually still financially in somewhat decent shape.

[00:24:21]>> Yeah.

[00:24:22]>> Right. So, >> look, look at compare the debt ratio of even France versus Germany. France's debt ratio is huge relative to Germany.

[00:24:29]>> It's almost twice as much.

[00:24:30]>> Yeah. So, is Germany going to take that burden on? I don't >> I don't want it. I don't want to. Like I was asking Matthew Pete, he was sitting in your chair about an hour ago. It's like, should Germany leave the Euro zone?

[00:24:40]>> Yeah.

[00:24:41]>> Right.

[00:24:41]>> Well, I think the answer is that inevitably if Germany is the is the is the financial bedrock, I mean, it has to, >> right? It has.

[00:24:48]>> It's the only pragmatic logical way.

[00:24:50]>> Yeah. Exactly.

[00:24:51]>> Otherwise, we get pulled down >> back to the Deutsch Mark.

[00:24:53]>> Yeah. No, I that's exactly the question asked. Should Germany reintroduce the Dutch market?

[00:24:57]>> The answer is absolutely yes, 100%.

[00:24:59]>> Yeah, it's it's it's mind-blowing.

[00:25:01]Absolutely. Michael, what a wonderful conversation. We could go on for hours.

[00:25:04]It's so educational. I could have listened to you forever. Really appreciate it. Thanks so much for coming to Frankfurt. Where can we send our audience to follow more of your work?

[00:25:11]Well, I think the the easiest or most straightforward is Capital Wars, which is my Substack. Um or you can go to our website, which is www.gindexes.com.

[00:25:21]>> Fantastic. Michael, we'll upload your presentation of course as well to the Doge Gold Messa YouTube channel and this will be uploaded to our YouTube channel of course. Michael, thank you so much for coming out. Tremendously appreciate it. Everybody else, what a wonderful discussion. Really enjoyed chatting here with Michael Howell. If you enjoyed it as well, help us out with the algorithm.

[00:25:37]Hit that like and subscribe button.

[00:25:38]Means a lot to us, of course. And let us know down below, should Germany leave the Euro zone? Let us know. Thanks so much for tuning in. Take care.