The rise and fall of gold and silver

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Hello, I'm Alan Kohler, Founder of Eureka Report which is now part of Intelligent Investor, which Money Café is also a part of, and I'm a Finance Presenter and Columnist for the ABC.

And I'm James Thomson, Senior Chanticleer Columnist at The Australian Financial Review.

And we are The Money Café. G'day, James. First time back this year, good on you.

Yeah, Happy New Year to you and all the listeners - it's probably too late to say that in February, but I'm doing it anyway.

Well, this is the first time we've spoken to you, so that's great. Okay, let's get straight into it, there's a bit going on overnight in Wall Street, software stocks were smashed and you've been writing about it this morning. Tell us what's going on?

A company called Anthropic, which is one of these rivals to OpenAI, they have a large language model called Claude, which is similar to ChatGPT or Gemini which Google has. They have released a new tool, a legal tool that promises to sort of automate tasks like contract reviews, compliance stuff, legal briefings, templated responses to clients... Now, that has sent absolute shockwaves through the software sector, basically because everyone's thought, hang on, if Anthropic can do this to the legal sector, who can't they do this to? Investors have basically decided we don't want anything to do with software. Some of the moves are extraordinary.

Consulting and analytics firm, Gartner, is down 22.5 per cent. The ratings agencies, S&P Global and Moody's down 10 per cent and 8 per cent respectively, based on the idea that what they do is crunch data - hey, Anthropic's going to be crunching that data soon. Even the local hero, Atlassian, this is a remarkable story, they're off 8 per cent. But it's worth noting, Alan, these fears about what AI could do to software businesses have been building for some time and Atlassian, which is of course Australian born to great example, the stock was down 50 per cent last calendar year, so 2025 calendar year. Since the start of this year though, it's down more than 32 per cent.

This Anthropic news with the legal tool has really sort of catalysed a bunch of fears that have been growing for a while. It's worth noting too, Alan, Australian software stocks have been smashed up in the last six months or so too. Xero and WiseTech are down 45 per cent and 50 per cent. We're speaking on Wednesday morning before the market opens, so who knows what will happen today. This is a sort of developing story, I think. The disrupters are well and truly being disrupted.

I was going to say, I don't know why everyone's surprised, this has been coming for a while, but as you say, this is not a surprise, they just happened to fall some more today, but they've already been falling because of AI's expected impact on software businesses.

I think this Anthropic thing has just sort of taken it mainstream. Everybody realises what's coming for them now.

I guess Anthropic's new legal software, whatever it is that Claude's going to do, would have made the stocks, if there were any, of legal employees collapse as well. If they're going to completely do all that routine stuff that law firms do, law firms won't need to hire juniors anymore.

Some of the biggest hammerings though, strangely enough, were in private equity and private credits. So, big private credit firm, Blue Owl, down 12 per cent; Blackstone down 5 per cent; KKR down 9 per cent... The estimates suggest that 20 per cent of the portfolios of private credit and private equity firms are tied up in software. And so, if you're sitting there with a private software company looking at software stocks down 35 per cent in the last five weeks, how do you mark the value of your privately held businesses. Think of Canva, Australia's great privately held business, worth $65 billion at the last count, how far do you have to mark that down now? Is it 20 per cent, is it 30 per cent? Is there another reason that it's only 10 per cent? I've got no idea, but this is going to seep through lots of different places.

We've got a good question on this subject, so why don't we return to it with the question...?

Absolutely

And talk about the RBA now. You wrote this morning...

A symbol of a mediocre economy.

Please explain.

Well, I think the problem with this rate hike, is neither the RBA or the Government can come out and say, "Hey, this is just what happens when the economy is booming..." because the economy is not booming. This is what happens when very low productivity growth limits the rate at which the economy can grow. We're essentially speed limited, we can't grow any faster than 2.1 per cent, around there, without sparking inflation.

That's right.

The long run average since 1960 for economic growth, is 3.3 per cent. This is a mediocre economy growing in a mediocre way and my view is, partly this has got to do with mediocre government over a long time. We've had no productivity reform, we've now got the Government - in the MYEFO, the midyear economic and fiscal outlook, Government spending jumped $17 billion over what it was in the budget. So, Jim Chalmers, I know he's making the point that the RBA is blaming this on surging private demand, but he's not helping. You look at what's happening in Canberra, if there was an effective opposition putting some pressure on labour, maybe this message gets through, but instead, the opposition is disintegrating. Again, mediocre politics, mediocre economy, I think it's not a great moment.

The Reserve Bank kind of spelled it out in the statement of monetary policy that comes out at the same time as the decision and in that statement, they said that September quarter GDP growth was at 2.1 per cent, which they say is the potential growth, roughly the potential growth of the economy, 2.1 per cent. And although we haven't got the December quarter GDP numbers from the ABS yet, they say that data since then shows that the growth in the December quarter was above the September quarter, which means that it's above potential growth and potential growth is, as you put it, the speed limit. That's fundamentally why they increased rates, because growth has suddenly outstripped potential growth. That's it, as you say, we've got potential growth at 2.1 per cent and average growth over the past few decades has been more than 3 per cent. I put a graph of productivity growth on the news last night and the RBA's forecast of productivity growth is also in that statement of monetary policy and it's 0.6 per cent.

What's the average over the last 10 years, Alan? It's 0.3 per cent.

They're predicting that it's going to pick up.

Yeah, the RBA's expecting productivity growth will double the 10-year average. I mean, even that might be ambitious. There's going to be lots written about is the RBA's forecasting right, all that stuff, that's all justifiable. But we've got a bigger problem than the interest rate hike here. We need to get real reform going, we've got to get this economy going again. Just ask listeners to ask 10 of their friends. Does this feel like a booming economy that warrants rate rises? No way. I think it's a bit disheartening.

Okay, on that sober note, let's move onto what's been going on in the markets, which has been a lot in the past week or so. We saw gold and silver crash last week.

Surge then crash, yeah.

Well, it's been surging for a little while, particularly silver, it's been a speculative bubble.

Yeah.

It fell on one day, 36 per cent, last week. A lot of people put that down to the nomination of Kevin Warsh as the new Chair of the Federal Reserve. I'm not sure that's right, actually. I mean, it's not entirely clear what the hell Kevin Warsh thinks about anything. I mean, is he a hawk or a dove? Who knows? Nobody knows. The idea that you sell off silver because of that is crazy and it's clear that the fall in silver didn't happen at the same time as his nomination was announced or even the punting, the rumours started circulating, it was some other time and the reason for it was that Chinese speculators had been piling into a fund called the UBS Silver Futures Fund.

That's the biggest kind of silver ETF, basically and they've been piling into that. What happened was that the commodity exchange increased the margin requirement for speculators and all of a sudden they had to get out because they couldn't meet the margin requirements. They're all on highly leveraged futures contract and that was what caused it. It was a sort of a rush out of silver futures contracts by Chinese speculators.

Yeah. Whether the announcement around Warsh was a bit of a catalyst - the US dollar did rise because while Trump has appointed Warsh and made it very clear he expects rates to fall, the market sees Warsh as a bit of a hawk on inflation who could actually increase rates over time and that's why you saw the US dollar rise and even bond yields tick up last Friday night. It didn't help the silver and gold case because the rise in silver and gold has been all about this debasement trade, which everybody loves talking about. The idea there is that the US will essentially let the value of the US dollar fall, because it's a) good for exports; and b) it reduces the "real" value of its massive debt pile.

Everybody's been saying, if the US dollar is not going to be worth as much as it was, I'm getting into gold and then subsequently, they got into silver. Yes, we've seen a speculative mini bubble in gold and silver, I think that's clear. We've seen that explode or be pricked in the last little while. Alan, do you think it's possible that gold and silver start climbing, perhaps in a more orderly way, once again?

I think it's fair to say that the US dollar is on the nose around the world. It sort of got accelerated by the Russian invasion of Ukraine in February 2022, when Russian assets were frozen in US dollars and a lot of other central banks and Governments thought, gee, this is bad, we better get out. But it's also true that I think people are looking for an alternative to US dollars and there's not much around. There's no point going into another currency because they're all getting debased by their governments as well. Bitcoin is too kind of flighty and speculative, so really it's gold and silver. But the thing is, it seems to me that what's been going on particularly recently, is not so much what you might call a sensible exit from US dollars into gold and silver reserves by central banks and so on, it's pure speculation in futures contracts.

It's worth remembering that the price that we quote, the gold price, is actually driven by futures, not by the price at which gold and silver are sold by the bullion companies, they actually work off the front month futures contract, which is the first - in February, the month is March, the March futures, that's the price everyone uses to price gold at. The whole thing is built around the futures contracts and futures contracts are basically one contract equals 100 ounces of gold and you only need $10,000 bucks to do it. The leverage is enormous, people are just speculating, that is to say, gambling, on futures.

The whole kind of pricing of gold and silver, although we talk about it as being an alternative to US dollars in central bank reserves and so on, it's actually just a speculation. That's not what's going on what's really causing the prices to go up and down. What it is, is speculation.

Yeah, well, it's been a fascinating market, as you say, in the last week. So much of this is driven by retail punters now rather than big institutions, all-knowing and all-seeing institutions, who are usually neither. So, look, it's going to be fascinating. What did you make of Warsh though, Alan?

Is that how you say his name, Warsh? I've been saying Warsh.

Probably, Kevin Warsh, yeah.

I haven't seen anything on YouTube...

Warsh sounds much less harsh, doesn't it?

I just don't know what he calls himself, I haven't seen any YouTubes of him saying his own name.

Let's go with Warsh, good point. Is he a hawk, is a he a dove, is he a bird, is he a plane? I don't know.

I think the idea that Trump's going to put anyone in who's going to raise interest rates or want interest rates to go up rather than down, is crazy. Obviously, he's a dove. The reason people think of him as a hawk, is because he's been carrying on about how the Fed shouldn't print money, but what he's been saying is that if the Fed stops printing money and goes into quantitative tightening instead of quantitative easing, then as a result of that, interest rates will come down, but that's rubbish. I mean, I don't know what he's talking about.

Yeah, fascinating stuff around his sort of view on - he's got big problems with the Fed's use of data, the Fed's level of transparency, the Fed's modelling... We could get a very different sort of Fed under Warsh, that's for sure. Maybe one that's a bit harder to follow, a bit more mysterious. I don't know if that's a good thing or a bad thing, maybe it's a good thing.

Someone said that he might not do press conferences after the decision.

Yeah, he thinks the Fed talks too much. Won't he think of the journalists, we love those press conferences.

His boss, Donald Trump - who is clearly his boss - he talks too much, he talks all the time. I think Trump's trying to make it a Trump Federal Reserve, whether Warsh does that, I guess, who knows? It is true that Trump appointed Powell and when he appointed him, he said what a fantastic fellow he is and he's going to be the best Federal Reserve Chair of all time and all this, but then fell out and started abusing him bitterly, fragrantly, extravagantly abusing him. Maybe that will happen with Mr Warsh.

We'll wait and see. Shall we do some questions?

Let's do that - but first, let's have a quick word from our sponsor.

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First question is from Luke, "Treasurer Jim Chalmers unashamedly cites Paul Keating as his political idol, the man who gave us record high interest rates of 17 per cent. Jim seems to be following in the same footsteps, by not taking his foot off government spending. With inflation still a concern, how do you assess the risk that continued high Government spending puts upward pressure on interest rates. If you say it is with Jim to reduce Government spending, can you get him back onto your podcast to talk some sense into him?

Certainly, Jim was very quick. Within moments of the RBA decision, he was very quick to point to the RBA statement and say, "Hey look, they're blaming accelerating private demand, not Government spending. Don't listen to me, listen to the RBA!" But I think there's a huge focus on this May budget. How does Chalmers and Albanese get the balance right between Government spending, actual reform that might make a difference to productivity and reducing some of those inflationary pressures and winning votes, as budgets are always about. I think this strikes me as one of the bigger budgets in recent times, Alan.

I agree and I think the fact that it's in deficit and will be in deficit in May is inherently, by definition, stimulatory. I mean, a deficit stimulates the economy and the surplus does the other thing, it contracts it. So, the Reserve Bank and the Government are now, by definition, at logger heads. The Reserve Bank is trying to slow the economy and the Government, through fiscal policy, is stimulating it. It is true that the Reserve Bank did say in the releases and everything that the main problem is private spending is going faster than expected. But it's also true that Government spending has increased.

And I think as much as Jim sort of says, "Look at what the RBA's saying," I don't think that's going to lessen the focus on Government spending, so the May budget will be a big one.

By the way, I'm interviewing Jim Chalmers next week for my new podcast series for the ABC, so that will be interesting and I'll ask him all that stuff about Government spending.

Very good. We've got two questions on AI, one from Dominic in Darwin and one from Johnathan. Dominic's referring to an article that was in the Murdoch press, with some comments from Hamish Douglas, who basically said that investors who are holding in broad stock market indices like the S&P500 and the ASX200 are going to be caught in a killing field because AI is going to revolutionise the entire economy over the next five years. Then Johnathan says he's interested in hearing our thoughts on a theory he has. If we see a crash in AI stocks, could this counterintuitively increase the adoption of the use of AI in the workspace? Say, hypothetically, AI can perform a person's role at a company within 80 per cent of human performance. So the mass rollout of AI replacement is held back by the better performance of humans, but with tightening budgets, as we'd see in a share market crash and AI being significantly cheaper, could this become a more cost effective solution? That's an interesting theory, isn't it, Alan?

Yes, I'm happy to get into that, but I don't understand why it's going to be a killing field. ETFs, right? Is that the proposition?

The proposition is that the sort of mainstream stocks - this is Hamish Douglas's view, that Mainstream stocks that currently make up the index are all going to be disrupted by AI and we're going to see new businesses emerge that are AI native, I guess, that spark waves of disruption. Holding the index as it is now, is not going to be a very safe place. You need to be a lot more choosier, is Douglas's argument about where to find winners and losers.

Because the big stocks in the ASX ETF are BHP and CBA, will they be disrupted, do we think?

Not sure, it's a good question. Harder to see BHP disrupted than CBA, I reckon. Sometimes in a quiet moment I will sit there and think about - okay, so AI now reckons they can take a lot of the jobs out of a law firm. These AI models are all through the banks, right? How long will it be until the AI models have ingested all the data that they need, got their heads around the work flows inside a bank and they could team up with some sort of pool of capital to start offering the services that a bank offers with zero cost and very high deposit rates. You can sort of think through that example and get to a world where even a giant like CBA is disrupted.

I know, but the big customers of the AI businesses are going to be companies like CBA. They're the ones that's going to be buying all the AI in order to replace their workers, which gets us to Johnathan's question, I guess.

Once you let these guys in the door, how do you stop them then replicating what you're doing. How many law firms would be asking that this morning after what Anthropic's just done. Why did we let these guys in again? Now they know everything about the legal industry. I think it's a really interesting question.

But it's interesting, the software crash on the market last night and over recent times is not a crash in the share prices of law firms, the expectation is that they'll switch from the software businesses that they're currently buying services from, such as Atlassian to Claude or ChatGPT, right? That's the proposition and the law firms will presumably stop employing people.

Yeah, but I guess, Alan, if you're going to spend $5 to $7 trillion dollars US on building AI infrastructure, do you think you'd just stop at the software industry...?

I see, so they're replacing law firms...

...for your push to monetise?

I don't know. Will Claude become a bank or ChatGPT become a bank to replace CBA? I don't know.

I guess my point would be, it's a lot easier to imagine that than imagining Claude becoming a minor, digging copper in Ecuador.

I guess that's right, isn't it? So, what's Johnathan on about?

What Johnathan is saying, is let's say we have a share market crash that causes a downturn in the economy, because companies are now looking to cut costs, do they actually increase their implementation of AI to do that, ironically?

I think that's chicken and egg. The reason there probably will be an AI crash is because the investors realise the revenue from AI isn't going to match the money that they're paying for these companies because it probably can't. The truth is, if it isn't a bubble and there is no crash because the AI is worth what everyone's paying for it, then it is going to replace everybody because that's how they'll make their money. There is a kind of paradox about it, which is how do these AI companies make money if everyone's out of work and unemployment is 50 per cent or something and nobody's making any income anymore and if the UBI, the universal basic income, that they're getting is nowhere near what they used to get?

I don't know what the answer to that is. I asked ChatGPT to give us an average of all of the estimates of permanent unemployment as a result of AI, because the estimates range from zero to 100 per cent with Elon Musk saying that AI will replace all jobs and other people say that, no, no, no, it'll be fine, there'll be no unemployment and all that AI will do is enhance existing employees. The answer was a 34 per cent permanent unemployment. As an average of the predictions that are being made by all sorts of various people. What do you reckon, 34 per cent?

Doesn't sound crazy to me. That's a pretty doomsday scenario. I mean, I would just imagine what the Australian economy looks like with unemployment running at 10 per cent or 15 per cent?

I know. Anything more than 10 per cent is pretty doomsday-ish, isn't it?

Absolutely.

It isn't going to be zero, right? Unemployment is 4 per cent, surely it's not going to stay at 4 per cent.

Yeah, good question, Johnathan. Your turn, Alan.

Brad says, "I'm 30, based in Adelaide, have a mortgage on an investment property. My mum has recently gained access to her super and is looking to help me financially. She's proposing to lend me a lump sum to hold in my mortgage offset account. As a loan, it would remain repayable to her, offer some protection in the event of a future relationship split and reduce interest on my mortgage. Does this sound like a good idea or is there a more efficient way to do it?" Well, that's one way...

Very hard, Brad, very hard to know what your circumstances are and what your mum's circumstances are. I would get advice on this because you don't want to trip into some sort of tax implications for either of you and you don't want your mum who's just got access to her super, her life to become overly complicated either. I presume it's a reasonably large amount of money and it's a fine sentiment of your mum's. I would go and get some advice because it's going to be very dependent on your personal circumstances of, we don't know what other debts you might have or what other issues you might have, it's just really hard for us to say.

It's worth just discussing it a bit because I think a lot of families have these kind of issues to think about and it seems to me, first question is, is this spare money from your mum? Does she need a return on that money or not? When you say it's a loan, is it an interest free loan? Do you give her repayments on that in order to help her live or is this money that she doesn't really need to invest at all in any - because she's got other income. If it's completely spare money, I would have thought she should just give it to you and it also depends a bit on how old she is. If she's 60 and got 30 years to live, then basically she probably needs the money eventually. But if she's 90, she might as well give it to you.

That's a good point. The question of how and when your mum might need the money back is pretty important, isn't it?

That's right. Is your mum saying she doesn't ever need that money back and it's always yours, in which case...?

Or it's just, stick it in the offset account for the next 10 years or three years or two years or one year to save a bit of interest and then I'll need it back.

Yeah.

That's an important question.

Our family, it's not so much the bank of mum and dad, it's the Santa Claws of mum and dad, because we've just given the kids some money. Also, we haven't worried too much about future break-ups. Are they going to break-up, how do you protect against that? Really, the fact is that the spouse is entitled to 50 per cent of the assets. Unless you have a prenuptial agreement or some conditions on the loan that it's always only just the child, I mean I don't know.

Cal says, "Long time listener, first time emailer. I'm a young person trying to get into the housing market, my job in IT is threatened by AI. The global geopolitical situation is in Chaos and climate change is causing record heat waves around the nation. I enjoy the podcast but it's usually a pretty grim listen, so my question is, got any good news?"

Are we a grim listen, usually?

Maybe it's my fault, Alan.

No, no, no, you're fine, I don't think we're that grim. Anyway, I think as you listed, the circumstances are a bit grim, aren't they?

Yeah, this is the message from Davos, that the world is going through a big sort of moment here. There's no real point sugar-coating it. There's always good things happening though. For all those worries about AI, the possibility that AI can make our lives easier or create some sort of medical breakthroughs, that's very real. It feels like we're on the edge of quantum computing, share markets are still at record highs, Australian household wealth is absolutely booming. I'd accept Cal's point that doesn't make it easier to get into the housing market. But I guess the good news is, Alan, we're facing into that grimness from a reasonably solid base. We can have a crack at fixing some of these things.

One of the good things about AI, is it means we've stopped talking about the problems of climate change for a while. I mean, we're just talking about AI now, climate change is off the agenda, we're not even worried about it anymore. But of course, it's still there, it's still happening and we've had one hot day this summer in Victoria at least.

I might just come in here with Marcus's question, Alan, because it relates to that... He's been looking at the performance of his share portfolio over the last year. A big part of his portfolio is both Australian and US based ethical ETFs, the performance on both has been woeful, actually going backwards in a year that the market overall has gone gangbusters. Marcus is saying, it seems to be a long-term trend. Have you noticed a shift in the market sentiment to favour or at least express ambivalence to ethical investing. How big is the Trump effect in that regard?"

Well at least you're ethical about it, Marcus. You're losing money but at least you feel good about it. I suppose the problem is that Trump has completely reversed the trend towards emissions reduction in the US at least. I think that's probably been a problem for ethical investment sources, ethical companies, because he's got drill baby drill going on.

Yeah and it's been very difficult in the last little while for particularly wind projects have really struggled and so I imagine that's where some of the ethical players have their money tied up. The ethical ETFs have also sort of struggled with how to get in on AI, because yes it's not immediately unethical, but it does use a lot of energy, power, water, and so that has been a bit of an issue. Maybe they haven't been as leveraged to tech as you might have wanted to be.

On the subject of pessimism and optimism, it's worth perhaps noting that I listened to a podcast of Elon Musk over the holidays and he said that he used to be pessimistic but he decided to be optimistic because it's better to be optimistic and wrong than a pessimist and right, that's what he reckons. I don't think that's true, but anyway...

I'm sure there's something to be said about taking advice from Elon Musk here.

You're speechless about that, aren't you?

Your turn, Alan.

Probably got time for one more question, or maybe two. Mick says, "Love the show and been listening to it from the very beginning. I have a question on valuation. The general consensus seems to be that the markets look expensive when viewed through historic PE ratios and I'm wondering whether it's less about the P needing to correct and more about the E being on the cusp of accelerating. One possible justification is that the companies are materially reducing labour costs through the rapid emergence of AI, effectively augmenting workers." I think this is an aspect of AI and ETFs that is probably worth looking at. I think there is a proposition that we're about to see an explosion in productivity globally as a result of AI, which in turn will increase all companies revenue, not just the AI companies.

Yeah, but even backing that out, Alan, Mick's right. The E in the PE multiple is what everyone's watching this year. I think in Wall Street the sort of projection for the index is something like 12 per cent earnings growth in 2026, similar in 2027. That's a big gains and that's not banking a whole lot of AI gains, although it's probably banking a bit of cost savings from labour in there. And in Australia too, we're about to see the E go through the roof, mainly as a result of higher commodity prices which are going to help resources stocks really deliver some big profits and frankly, we need that to happen. We've had three consecutive years where at an index level earnings have gone backwards.

We're talking about a mediocre economy and political situation in relation to the RBA. That performance from our biggest companies has been pretty mediocre too. So we will see that improve from the resources stocks over the next six to 12 months. We are on the cusp of a bit of an earnings boom. The question I've got, Alan, is does that keep propelling stock markets higher or does it just mean it justifies the current very stretched valuations? I think that's the bit that's tougher to answer.

The question I have, does that apply to iron ore? Which is the main mineral that Australia digs up and Australian big mining companies dig up and sell. I think that's probably everyone's saying that it certainly refers to copper and rare earths and all that stuff. Gold and silver are also booming of course, but what about iron ore. That depends on the Chinese economy and in particular, Chinese construction, which is kind of heading south.

Price is still holding up really well at $105 US dollars a ton for iron ore. Logic says, given that the US construction sector is in the toilet and has been for nearly four years and also that Chinese are pumping a lot of steel into electric vehicles, which they're clearly producing too many of, more than the world needs. Logic says that there's going to be some pressure on the iron ore price. But China's ability to juice its economy with debt and keep growth rates high, it's probably the wrong thing to do long-term, but there's no backing away from it and while there's no backing away from it, the iron ore price probably stays pretty solid. One day, China's going to have to try and rebalance its economy and that's going to be very painful for us, but I don't know when that day is. China's watchers say it's going to have to be in two to three years because the size of the Chinese debt is just so immense, but they've been saying that for a little while too.

Yeah, that's true. I think we better leave it there, thanks very much for listening, everyone. Thanks, James, good to talk to you again for the first time this year. Thanks, everyone, for listening. I'll be back next week with Stephen Mayne, so send in your questions to themoneycafe@eurekareport.com.au. Until then, I'm Alan Kohler, person on the ABC and a part of Intelligent Investor.

And I'm James Thomson, Senior Chanticleer Columnist at The Australian Financial Review. Talk to you soon.

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Got a question for next week? Please send it to themoneycafe@eurekareport.com.au.