In a recent interview with Michelle Makori, Lead Anchor and Editor-in-Chief at Kitco News, macro research analyst Luke Gromen discussed his views on the shifting dynamics of global reserve assets, the implications for U.S. treasuries, and the potential future role of gold and Bitcoin.
Gromen is the founder and president of Forest for the Trees (FFTT), a macroeconomic research firm that he established in early 2014. Gromen has over 25 years of experience in equity research, equity research sales, and as a macro/thematic analyst. FFTT is known for aggregating a wide variety of macroeconomic, thematic, and sector trends to identify investable developing economic bottlenecks for its clients, which include both institutions and sophisticated individual investors.
Before founding FFTT, Gromen was a founding partner at Cleveland Research Company (CRC) from 2006 to 2014, where he worked in sales and edited CRC’s flagship weekly thematic research summary piece, “Straight from the Source.” Prior to that, he was a partner at Midwest Research, where he contributed to equity research and sales from 1996 to 2006 and was the founding editor of “Heard in the Midwest,” a widely-read weekly thematic summary
In his interview with Kitco News, Gromen highlighted a significant shift in the global financial landscape where U.S. treasuries are losing their dominance as the primary reserve asset for central banks. According to Gromen, this shift is driven by several factors.
Gromen explained that mechanical adjustments play a role, as when the U.S. dollar becomes too strong, central banks sell U.S. treasuries to raise dollars. He also pointed out that geopolitical risks have made U.S. treasuries less attractive, as the U.S. government’s actions, such as seizing Russia’s reserves, have made other nations wary.
Furthermore, Gromen noted that economic realities are shifting, as nations prefer reserve assets that maintain or increase their value relative to commodities like oil and copper. According to Gromen, gold, with its historical stability, fits this need better than treasuries.
Since 2014, global central banks have sold $400 billion in U.S. treasuries and purchased $600 billion in gold, reflecting this strategic pivot, Gromen stated. He believes that gold is becoming the leading reserve asset for central banks due to its stability and security. Gromen highlighted that central banks have been buying gold at record levels, with the first quarter of 2023 seeing a demand of 290 tons. He predicts that gold will continue to overtake U.S. treasuries as the preferred reserve asset.
Gromen argued that the U.S. dollar is overvalued and that efforts to reshore industrial production in the U.S. will necessitate a weaker dollar. He emphasized that the U.S. cannot sustain high real interest rates without triggering a debt spiral due to its high debt-to-GDP ratio and large deficits. Gromen suggested that the Federal Reserve may need to cap interest rates, negatively impacting the dollar.
By 2030, Gromen envisions a dramatic increase in gold prices. He used historical ratios to suggest that gold could rise to 3x to 6x its current price, potentially reaching as high as $42,000 to $44,000 per ounce if a dollar crisis akin to 1980 occurs. Gromen stressed that gold’s current price does not reflect its potential value as the primary reserve asset.
Gromen explained the gold-oil ratio as a key indicator of the health of U.S. treasuries as reserve assets. According to Gromen, a high gold-oil ratio indicates increasing competition from gold against treasuries, suggesting a weakening position for treasuries.
Gromen views Bitcoin as a digital gold-like asset that benefits from increasing dollar liquidity. He sees Bitcoin as an energy-linked, neutral reserve asset for individuals, with potential for significant appreciation in value. However, Gromen noted that Bitcoin’s market size is currently too small for central banks to adopt it as a reserve asset.
By 2030, Gromen anticipates substantial changes in the global financial system, with gold and possibly Bitcoin playing more prominent roles. He expects Bitcoin to outperform gold due to its higher volatility and smaller market size, making it more responsive to shifts in demand for value-holding assets.
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