While COMEX slept, tokenized gold revealed a signal
In this discussion with Duke University finance professor Dr. Campbell Harvey, we examine the rise of tokenized gold, the potential return of a digital gold standard, and how blockchain technology is changing markets that have existed for centuries.
The conversation also covers the future of fiat currencies, the role of central banks, Bitcoin vs gold, global de-dollarization, and why gold continues to play a critical role in the financial system.
As finance evolves, understanding how tokenization, digital assets, and monetary competition interact could become one of the most important economic questions of the next decade.
Follow Monetary Metals on X: @Monetary_Metals
Follow Dr. Campbell Harvey on LinkedIn.
Additional Resources
“Tokenized Gold” with Chen Lin, Daniel Rabetti and Che Zhang.
“Understanding Gold” with Claude B. Erb
Cam Harvey’s Podcast: Through the Noise
Transcript
Monetary Metals:
Welcome back to the Gold Exchange podcast. My name is Ben Nadelstein of Monetary Metals. I’m honored to be joined by Dr. Campbell Harvey. Dr. Harvey is a professor of finance at Duke University and a research associate at the National Bureau of Economic Research. He’s the former President of the American Finance Association and a former editor of the Journal of Finance. His latest books and his latest research on decentralized finance, tokenized gold, and real-world assets is so cutting edge. We needed to have him on the podcast, and here he is. Dr. Harvey, welcome to the show.
Dr. Campbell Harvey:
Thank you for inviting me.
Monetary Metals:
Dr. Harvey, I want to start with a tough question. Over the weekend, there were strikes on Iran, and tokenized gold was trading 24/7. That’s one of the benefits of tokenized gold. While older exchanges like the Comex were actually closed. And what happened was the gold price on these tokenized exchanges was effectively predicting Monday’s opening price, but with a little bit of a premium. So Dr. Harvey, are we watching the birth of a new digital gold standard?
Dr. Campbell Harvey:
Yes. So this is the fascinating idea with tokenized gold. And gold is not just another commodity. So gold is the oldest financial asset. It’s been around for a millennia. Up until August 15th, 1971, it was a currency. We went off the gold standard in 1971. What tokenized gold actually makes possible is a return to a digital gold standard. And a standard debt is opt-in, so it’s up to you.
And it doesn’t involve any central banks whatsoever. So I think it’s fascinating to have another medium of exchange, another store of value that can be easily used. And there’s so many advantages here. You mentioned one of them. So the strike on Iran, it was announced in Israeli media at about 1: 13 AM Eastern Time.
And then the President announced on social media at 2: 30. And you can see at 1: 13 AM, the tokenized gold price, which is available 24/7, 365, traded on multiple venues, both centralized exchanges and decentralized exchanges, the price starts to surge. So while Comex was sleeping, we’ve got an active market For those that needed a safe haven asset, but the traditional exchanges were just not available, tokenized gold actually played its role.
And yes, you’re also We’re correct. Very good at predicting the price at the open for the futures. Just to be clear, the futures trades 23 hours a day, but only five days a week. So it’s very limited on one venue. Tokenize Gold trades on multiple venues around the world. It is available at any time.
The last thing I’ll mention is you mentioned a premium, and this is fascinating to me, and it’s something I didn’t know before I undertook this project, that the Paxos token, which is P-A-X-G, Pax-G, it trades at a premium to spot. There’s another gold token out there, X-A-U-T, which is the Tether token. It It doesn’t trade at a premium to spot. It’s really close to spot.
So what is going on? And I’ve thought about this deeply. And in finance and economics, we sometimes call this a convenience It’s a premium, it’s a convenience yield. So that means that it’s available all the time to trade. And it’s not constrained by banking or exchange business hours. It is available all the time. Now, that explains a premium, but it doesn’t explain the premium over the Tether token. And just by the way, I have no conflicts of interest on this whatsoever.
So nobody is paying me as a consultant. I’m an academic, and I’m curious. If you look at these two tokens, they are different in a number of dimensions. Number one, the Paxos This token is warehoused by Brinks in London. And Brinks, this firm that has been around forever, it’s got a grave reputation for security.
Whereas the Tether tokens are in a nuclear proof bunker in Switzerland. Actually, before this research, I didn’t know that Switzerland had 250,000 of these hardened bunkers in their country. So I’ve got one of them. So it’s a bit different in terms of the custody. But importantly, Paxos is registered, the trust company is registered in New York and fully regulated by the New York Department of Financial Service, which is a very high reputation regulator known for being tough.
And that’s exactly what you need in this space. The Tether token is not regulated in the US. It’s effectively offshore. It’s not traded on any central exchange in the US, whereas the Paxos token is. And then I’ll mention the third difference, which might be the most important in explaining the premium. This is that the Paxos token has got what’s known as Bayelment.
Let me take a step back and talk about the stablecoins in general. So one issue with the stablecoin issuers, let’s say, like circle. We send circle our US dollars, they send us a token, and then the collateral that we’ve sent actually is invested in treasury bills and reverse repos. We can see it.
But what if circle gets into trouble? They do something else. They make a bad acquisition or something, and they go bankrupt. Well, it used to be that the token holders are just another creditor. You’re just in line. The genius In fact, what it did was it put the token holders number one in line, so the first claimants. This makes the token a lot less risky.
The same thing could hold for the gold tokens. But Paxos has this ingenious idea called bailment. Bailment is that when you get the gold token, it is backed by a specific gold bar, the serial number on that bar. So you’ve got ownership in that bar. So if Paxos went bankrupt, Well, you’ve got ownership of that bar. So it’s a very strong legal protection. So again, this is very exciting. My paper tokenize gold. We have this event that happened after we put the paper out to the public.
We quickly updated the paper to incorporate the analysis as to what happened over the weekend, where you’ve got a major geopolitical event happening when traditional exchanges are closed.
Monetary Metals:
Dr. Harvey, do you think that this decentralized finance where people can trade 24/7, there might be this more liquidity, there’s all these benefits to these tokenized gold projects compared to more centralized exchanges or traditional finance. Do you think that over time, that these decentralized financial institutions will overtake these standard or traditional financial institutions, and gold being the spearhead asset for this?
Dr. Campbell Harvey:
So let me put in perspective, and this is important. Before 2009, everything was centralized. We depended upon the banking system and traditional exchanges. And 2009 was when the first Bitcoin were produced, and this is truly a decentralized technology. So using blockchain technology. It is a peer-to-peer technology.
Now, that said, the trading that actually happens, happens in two forms. One form is with a centralized exchange. So think about Coinbase as an example of that or Binance. So that means the same thing as if trading equities, so stocks. You’ve got a broker. The broker actually holds the stock in the broker’s name. Now, at any point, you can request the stock be moved into your name, but it’s in the broker’s name at the brokerage.
With cryptocurrencies, it’s the same thing at a centralized exchange that you are delegating, you are trusting the exchange or your broker with the private keys. Again, at any point, you can repatriate your crypto, but you’re trusting a centralized player. As soon as you do that, then we’ve got this mix of decentralized finance, which is the actual token itself, and centralized finance, which is the broker that you need to trust.
It is identical for or a tokenized asset that is a real-world asset, but there’s another dimension to it. It’s identical in that we can trade tokenized gold on a decentralized exchange, and that is what I call peer to liquidity pool transaction. You can do that at any time. Liquidity is constant through the day or the week or the year. Or you can trade it on a centralized exchange. You got those two options.
But when we talk about a real-world asset tokenization, there is another layer of centralization, and that is the issuer. With gold, that is a physical quantity, and it needs to be warehoused. The collateral needs to be warehoused. So stablecoin, like USDC for circle, it is the same thing. You got collateral. You don’t need a warehouse for the collateral, but you need to invest the collateral. That needs to be visible, audit, attestation, stuff like that.
So circle and Tether, USDC and USDT, these are centralized stablecoins, and these stablecoins operate freely within the decentralized system. But you need to trust the issuer. And the same thing with tokenized gold, that there is a degree of trust that’s necessary. For example, we need to trust that the collateral is actually in the vault, that the collateral is fully backing the tokens, and we need to trust that the quality of the gold is close to 24 carat.
So all of this can be audited, but the audit does not happen continuously. The audit happens every so often. So again, there’s a degree of trust. So the way I see this space is that decentralized finance has introduced some very useful tools that has disrupted the way that we think about finance. Do I think that we’re moving to a 100% decentralized world? No. There’s certain things that are really difficult to decentralize.
And the vaulting of gold is Exhibit A. We can have a decentralized vault for a cryptocurrency, but if that crypto is collateralized, it is necessary to have some centralization. There is some trust involved here. For me, it’s fairly straightforward. In the future, we don’t have a binary outcome of 100% centralized or 100% decentralized. It’s a continuum, and the continuum depends upon the application, and what will win is the most efficient. To reduce the frictions, reduce the costs, to enable the increase in productivity, that’s what is going to win, and it’s not going to be a binary world. Of centralization versus decentralization.
Monetary Metals:
And Dr. Harvey, economist Thomas Sowell, notes that there’s no solutions, there’s only trade offs. And in the centralized world, there might be some trade offs. And in the decentralized world, there might be some trade as well. In terms of the trust factor, where do you see pricing coming into this?
We mentioned there’s maybe a premium or a difference in pricing between tokenized gold from one provider versus another provider. Do you think the same will be true of all types of assets where Maybe centralization will have a premium or a discount, depending on the issuer. And that’s how people will say, Well, I’m a grandma. I don’t know much about this whole cryptocurrency, and I’m maybe not in Dr. Harvey’s class, but I can see the price of this asset is such a discount. There must be some risk to it. You think that’s how it will go in the future? Instead of people understanding how cryptography works, they’ll simply look at the price of the asset?
Dr. Campbell Harvey:
That’s how it works today. So if you take more risk, the expected return is higher. So it’s one of the fundamental notions of finance. Let me give you an example. If you look at the savings deposit rate on average across the thousands of banks in the US, it is 42 basis points or 0. 42%. And we know inflation is running near 3%. We know that we can get on a money market fund, maybe three and a half %. But the savings rate is 42 basis points, and that’s not the whole story. So the whole story is, well, what about…
That’s the average across thousands of banks, and many of these banks are really small. What about the big banks? So what about Chase? What about Bank of America? When you go to their websites and you can see that the entry-level savings deposit rate is one basis point. That’s point 0. 01%. Just by the way, that’s not a daily rate. That is the annual percentage rate, one basis point. So how do you explain that difference? It’s some small bank might be paying 2%, Chase paying 0. 01%, and it’s all about risk. So these giant banks are too big to fail.
We have seen the track record of what the federal deposit insurance agency has done in the past. They get into trouble, they’re bailed out. That’s how they get away with only giving one basis point of yield. It’s trivial. Again, we see this all the time. If you’re buying a corporate bond for a AA-rated company, the yield on that bond is fairly low compared to a junk bond, which is pretty high. And that junk bond might default, you How do you not get your principal back.
So again, looking at market prices is very informative. It tells you something about the risk. And I actually recollect teaching in my course in the spring of 2022. And at the time, people were buying this stablecoin called Terra and then depositing it in a lending protocol called Anchor. Anchor was offering 20% annual percentage rate. And this is the time in 2022 when interest rates were close to zero. So they were less than 1%. And then you can get 20%. And I’m telling my students, Well, what does that mean? It means risk. It means That there’s something that could happen to cause a significant loss, and that’s exactly what happened.
So yes, you need to be aware of this, and there’s no free lunch. Launch. If there’s a higher rate of return, it is possible that there’s a mispricing, but usually that is corrected with arbitrage. The higher rate of return has to do with the risk. The example that I gave you with the tokenized gold from Paxos, the tokenized gold from Tether, there’s a different risk profile for the two of them. There’s a premium that is associated with the Paxos token.
Monetary Metals:
And so, Dr. Harvey, I want to ask you about gold and these different jurisdictions. Obviously, over time, gold has become a global asset and a global commodity. It’s traded globally from Dubai to London to New York, but we’ve seen a de-globalization trend. How important do you think gold will be in terms of its different geographies going forward? If gold is produced in China and maybe doesn’t leave, or if it goes to Hong Kong or Dubai or London or New York, how important from tariffs to geopolitics is gold’s location going to be going forward?
Dr. Campbell Harvey:
I have another paper that hopefully you can put a link to, and it’s called Understanding Gold. It’s a really good starting place, and it deals with many of the issues that are embedded in your question. At the beginning, you mentioned de-dollarization. So the act of de-dollarization started in 2022 when Russia re-invited Ukraine. And the US launched sanctions on the swift access to Russian banks and Russian companies. And this was the first time that the dollar was weaponized against against a major power. Yes, it had been weaponized against North Korea, but that’s not a major power. It’s a small power.
Russia realized that they needed to de-dollarize, and not by choice, but their neighbor, China, realized that, Oh, this can happen to us. So we need to actively de-dollarize. So no surprise that the central bank that is the number one buyer of gold is the People’s Bank of China. So this is something that they’ve been pursuing for a while. And if you look at the total holdings of gold by China, it is very small compared to the US central bank holdings. China, it’s reasonable to expect that they will increase their holdings. It’s pretty well infeasible for them to get the same per capita gold holdings as the US.
It would be just enormous. They would have to acquire all of the world’s production for multiple years, and that’s just not going to happen. China, by the way, is the largest producer of gold in the world, but it’s only 12. 5%. Gold production is very decentralized across many different countries. It’s not like China controlling rare earths US, where they’ve got over 95% of the world production or even the aluminum.
I recently featured this on my LinkedIn that 59% of aluminum production is based China, and the US is less than 1%. Again, gold is different, it’s much more decentralized. As a result of this, it’s attractive because It means that no country can significantly influence the gold price. It would have some effect if China stopped export of gold, but it, again, is small compared to the overall world of production.
So this idea of de-dollarization is very straightforward. Many companies or countries and companies, hold in reserve US dollar assets. And given that the US has had this persistent trade deficit and persistent fiscal deficit, That there’s a lot of government bonds that are held outside of the US. About half is held outside the US.
And some countries have questioned whether they should diversify. The question is deeper than that. It speaks to, will the US be the reserve currency in the future. Many countries have had reserve currency status, but it passes on to somebody else. Now, it’s not obvious what the next reserve currency actually is.
For example, the Chinese currency, nowhere near the status of a reserve currency, given that it is a currency that’s managed. So any intervention just knocks you out as a reserved currency status. But given it’s not obvious, then why not go to gold? So again, gold has got millennia of a track record, and indeed, gold has held its value through time.
My research, a paper called The Golden Dilemma, which I update in understanding gold, looks We had a few fascinating situations. So with my co-author Claude Herb, we discovered the price of a loaf of bread in the time of Nebuchadaiser. So it’s like 2,500 years ago, and the price was in gold weight. What we did is we asked the question, Well, what is the value today of that weight of gold? It turns out that the loaf of bread, $7. I’m thinking about it.
Obviously, you can buy a loaf of bread cheaper than $7, a Wonder Bread, for example. But I’m thinking that a better comparable would be like an artisanal loaf of bread. I know that that is probably similar in quality to the oven, the stone oven that the bread was cooked in 2,500 years ago. So this $7 is what I paid for a loof of bread at my favorite artisanal bakery. So what that means is that gold has held its value.
The other example we give is a Roman centurion. So the Romans had great records of what the soldiers got paid, and we’ve actually got the coins, so we can figure out the purity of the coin. Given what the centurion was paid, it comes out to a certain number of ounces of gold, and that’s not that different than the pay of senior people in the US Army make today. Again, this is evidence that gold has held its over the extreme long term. And let’s be careful here because gold is volatile. So it is as volatile as the S&P 500. But nevertheless, over very long periods, it’s held its value, which means it moves with inflation.
It is an effective hedge for long term inflation. And again, this is sharply different than fiat currency, which degrades through time with the rate of inflation. So our fiat currency does not grow with the rate of inflation unless it’s wisely invested. So there are these attractive elements to gold, and it’s also interesting that the central banks actually hold gold.
So this is something that they deem to be valuable. It is not a relic from the past. If it was a relic, then the central banks would have dumped their gold, and the US has not touched the gold stock, except in a very minor way since 1971. So again, this is something the tokenized gold is fascinating because it provides yet another A bigger venue for gold.
It’s also highly divisible, so you can go to 18 decibel places. So this means it can be used for payments, micro payments, which is really important. These other forms of gold, like an ETF or a futures or some other type of certificate, you’re not going to be paying for stuff with those. This allows for not just an investment, but a payment mechanism. So think of keeping a certain amount of float in gold.
You can use it to buy everyday things. And of course, In the future, with tokenization, it won’t just be gold. So gold will always have a prominent role, but we’ve got tokenized fiat currency, the stablecoins. We have tokenized stocks, tokenized Tokenize land, tokenize everything. For payment, you choose. You want to pay in silver? Fine. Gold? Fine. It’ll be seamless. When you tap your phone at the checkout It’s the same thing. The payments happen within 1-12 seconds. It’s very, very seamless.
In tokenize gold, also, it’s a different ecosystem than traditional gold ecosystem, but it is also possible to earn yield on this. You can plug it into DeFi protocols in terms of staking and earned yield. It’s actually interesting When you do that, you get another token back. It’s called a staking token that you can use to redeem your gold token at any point. But that staking token is also valuable and could be used in another protocol to earn a second layer of yield. Indeed, you could lend it out.
That’s what banks do. I tell my students the story of how banking actually works. She put $100 into a banking account, and then the bank sends $10 to the Federal Reserve as a required reserve and then lent out the other 90.
So you’ve got $100 in the bank, you’re You’re earning some interest, maybe it’s not that much, but let’s say you’re earning some interest, and then the bank lends out the 90, somebody else gets that 90 and it’s deployed in another bank. And the same thing happens. So $9 is sent to the Fed as a required reserve, and then $81 is lent out.
So what’s interesting is the person with the $90 in the bank is earning some interest. And then the person with $81 in a bank is earning some interest. So the original $100 is multiplied, and there’s multiple layers of interest paid on that original $100. So what’s fascinating about this new decentralized finance space is that you are not just the bank, but you can be multiple banks and collecting interest multiple times. Then sometimes it’s called yield stacking. This is completely different, very interesting that we can actually do that. Again, you get rid of the banks and everything is in your pocket. Literally, your smartphone is your bank.
Monetary Metals:
Dr. Harvey, since you’re an expert, I do want to ask you this question, which I’ve asked all the guests in the past, and you’ve brought it up about tokenizing all assets. My two questions are this: when all assets are tokenized in some way, meaning they’re more liquid, they’re spendable, what is the argument for non-monetary assets? Like, for example, fiat currencies. If you know, Hey, every year, it seems like these fiat currencies seem to lose value, why keep them around?
Dr. Campbell Harvey:
So let me answer that question. So The answer is very straightforward. That is that the government actually benefits from issuing currency. This is a concept of seniorage, and they benefit from this. They control the monetary policy for the fiat currency.
In the future, the fiat currency, at least in the US, is not going away. It will be enforced in two ways. Number one, if you work for the government, you are paid in fiat currency. You can take that currency and flip it into gold immediately or something else, but you’re paid in fiat currency. That’s number one.
Number two, your taxes will be paid in fiat currency. This is the leverage that a government has. What we will have is a situation where the monopoly on fiat currency will be broken. There’s another interesting angle here, and again, I discuss this in my course, that once you have these other payment mechanisms or if you had a de facto gold standard with tokenized gold and things like that.
When fiat lose If it loses its monopoly, then we need to step back and think about inflation. Inflation is purely a fiat monetary phenomena. Once you replace the fiat or provide competition for the fiat, then the concept of inflation is completely different.
Gold, as you know, also has inflation, but it’s minor. So the inflation rate, so if you look at the last 10 years of gold inflation, and what I mean by gold inflation is the new supply, so the new mine supply. So That inflation, compared to the gold above ground for the last 10 years, has run less than 2% a year. So between 1. 5 and 1. 9%. And that’s about the the same rate as real economic growth.
So this is completely changing the way that we think about inflation. Indeed, I made the claim that fiat inflation in 50 years will be considered a historical curiosity. Something a display in a museum where you see some paper money and coins. Yeah. So again, the monopoly is broken. There are some countries that will be usurped. And those are the countries that have reckless monetary policies.
And let me give you an example. Venezuela. So this is a country that is very rich in natural resources and human capital that had their economy destroyed by irresponsible fiscal policy as well as monetary policy. So Venezuela is facing extreme inflation. If you are rich in Venezuela, you’re able to up a US dollar bank account in Miami.
Even though inflation is very high in Venezuela, you’re hedged because you’ve got a US dollar bank account in Miami. If you’re poor in Venezuela, then you’re screwed. In this new world, it’s completely different because if you’re not wealthy enough to have a bank account in Miami, you are wealthy enough to have a smartphone. And on that smartphone, you’ve got your stablecoin that’s linked to the US dollar. And that is like a bank account in Miami. Me, except it’s a bank account in your pocket. And you might have tokenized gold.
So again, you think about gold. Gold is really awkward because especially in a a country where the legal system is up in the air, there’s security issues. Whereas tokenizing the asset, you’ve got the ability to have it highly secure a place. So only knowledge of the private key allows you to spend the tokenized gold or the tokenized dollars.
So in a situation like that, in a country that has got an irresponsible monetary and fiscal policy, then it might be that the local currency just goes away, that people just don’t want to use it. However, again, I think that these local currencies will remain, but the fact that there’s competition means that there’s a way to discipline.
If you do reckless things with your local fiat currency, then people just not going to use it, and then governments lose control. As we know, many governments, the primary objective is to remain in control.
Monetary Metals:
For those interested in learning more about monetary competition, they can check out our 2026 Gold Outlook Report, where we talk about currency competition, monetary competition, gold, Bitcoin, the US dollar, stablecoins.
Dr. Harvey, as we come towards the end of our interview, I want to do a rapid fire section with you. I’ll ask you questions from all over the map, and you can answer as short or as quick as you’d like. And I’d like to start with silver. So gold and silver have been monetary metals throughout history. But with the advent of tokenized gold and the fractional nature of tokenized gold, do you still think that silver will have a monetary role going forward, or will it become an industrial or other type of metal rather than monetary?
Dr. Campbell Harvey:
So this is important Both gold and silver are used in things. So 5% of gold production is used in technology, 50% in jewelry, dentistry is silver, the same thing. So these are actually used. Do I think that silver will be a monetary asset, probably not, but it is an example of a tokenized commodity. We will see many more commodities that are tokenized, and people will easily be able to hold these tokenized commodities and pay for stuff in the tokenized commodities. And gold and silver are low hanging fruit. Silver also has a very long history. But to think that silver is a substitute for gold, I don’t think so. Is it a complement? Yes.
Monetary Metals:
Now, Dr. Harvey, I want to ask you about what was touted as the new digital gold, and that was the cryptocurrency Bitcoin. Do you still think that there is an argument that Bitcoin is digital gold, or are they different assets entirely?
Dr. Campbell Harvey:
So there are some similarities. So one is the rate of inflation is really low. Another is that production is decentralized, and that’s true for Bitcoin and gold. It’s also true it’s very expensive to produce Bitcoin, and it’s very expensive to produce gold. There’s many different similarities.
My new paper, this is the third paper I’ve recommended, and hopefully you put all these linked on your website, is called Gold and Bitcoin. And I go through these similarities, but I point out the differences. So the first difference I’ve already pointed out, the gold is actually used for stuff like jewelry, technology, dentistry. Bitcoin isn’t. It’s got no fundamental value.
The second difference is really important, and that is that Bitcoin is dependent upon its network and the so-called miners that are maintaining the network. If the network is attacked, then people would lose confidence in Bitcoin and the price could plunge to zero. In my paper, I sketch a credible scenario where the network is attacked. It’s called a 51% attack. I go through the details as to how Which it would cost. And in the past, it didn’t make any sense. Because why would you spend billions of dollars to attack the network to take over all these Bitcoin when there was zero in the end?
Nobody would do that. But in the last For the last few years, things have changed. And what’s changed is the growth of the derivatives markets. So there’s a credible attack where you want the price of Bitcoin to go to zero because you’ve got a massive short position. So again, this is a unique risk. And the last thing I’ll mention is that Bitcoin is volatile. So think of it as having four times the volatility of gold. So not only does it have a very short track record of only 17 years, whereas gold has got millennia, it is brutally volatile. So it is hardly a safe haven asset.
Monetary Metals:
Next question is on the safe haven asset. Do you think that treasuries are no longer going to be seen as the safe haven asset, and other assets like gold are to take that mantle piece, or do you think that gold will still have to compete with the US Treasury?
Dr. Campbell Harvey:
This is not a binary situation, gold or treasuries. So people will have part of their portfolio dedicated to safer assets. It used to be the ultimate safe asset is the 10-year treasury. Any issue, people buy that, price goes up, yield goes down, and we see it immediately, so-called flight to safety.
However, given the US situation with $1. 9 trillion deficit, $38 trillion of debt, 1. 4 trillion in interest being paid every year on the debt. People wondering, Is this the ultimate safe haven asset? Maybe no. Does that mean I should dump all my US dollar holdings? No. Does it mean that I should diversify and put some different assets into my portfolio so I’m not 100% dependent upon the US? Yes. What’s the leading asset to add to my safer portfolio? Gold.
Monetary Metals:
Dr. Harvey, now I do want to ask you about debt and interest rates in this rapid fire section. Does debt still matter? Is there a certain debt percentage, number, level that we need to be worried about as Americans, as US citizens? Is the interest rate or the expense on the debt the most important? How important is this debt number and what metric should we be paying attention to?
Dr. Campbell Harvey:
People usually look at debt divided by GDP, which is in There’s also some issues as to how to count the debt. I could go into that, but I quoted 38 trillion, which is what I believe the debt actually is, which is more than the US GDP. Now, we do need to be careful here because debt is what we call in economics a stock, whereas GDP is a flow. So think of GDP as income. So This is like debt divided by annual income.
And as consumers, it’s not unusual to take a mortgage where the mortgage might be worth more than your annual income. This is not unreasonable. You might say, Well, the house is collateral. Well, the US has got plenty of collateral in terms of all the stuff that is counted in terms of assets. So just as an aside, you should look up on the US government balance sheet what their holdings of gold are actually worth. So that gold is on the balance sheet at, I think, $40 an ounce. So again, you’ve got all of the stuff that is off on the balance sheet or misrepresented on the balance sheet. So we need to be careful there.
Economists don’t really have a good answer on this as to what the maximum should be. So you look at Japan, It’s like 225% of debt divided by GDP with a population that’s got very unfavorable demographics, and they’ve done fine. You might complain What does it mean about the growth rate in Japan as being low.
Well, we should look at per capita growth. I don’t know why people look at total. You need to look at it per capita. That’s what really counts. If your population is declining, then your GDP will be declining. But it doesn’t mean that you’re worse off. The per capita could actually be higher. I think that all this needs to be taken into account. That’s it. It is unnecessary It’s not necessary.
At a time of reasonably strong economic growth, low unemployment, low inflation, record stock market to be running a $1. 9 trillion deficit, that is just fiscally irresponsible. So, yes, there is risk. I’m not sure we’re at that point. I do think that our house will be put in order probably in 2033. And I picked that year because that’s the year that the Social Security Trust runs out of money.
And when that runs out of money, there’ll be a haircut of at least 20% for those getting Social Security. And I think that will be the call to action to put the house back in order. And it’s not going to be easy.
Monetary Metals:
Dr. Harvey, let’s say someone’s listening to us and they say, Well, Well, you guys are both wrong. I know you’re both handsome gentlemen and you sound smart, but this AI revolution is going to lead to so much growth. We won’t need to worry about the debt anymore. We won’t need to worry about fiat currencies, inflation, goals. All of this is going away because we’ll have the power of AI. How important is AI, Dr. Harvey?
Dr. Campbell Harvey:
That person saying this about AI should take a look at my LinkedIn because I actually make a similar case. So let me sketch what our alternatives are to put our Fiscal house in order. So number one is increased taxes, and nobody wants that. No politician even uses the word. They use it like another code for tax because they don’t want it clipped out into an audio and used against them. So it’s off the table.
Also, tax is anti-growth. So number Two, you just inflate. So think about paying off the 38 trillion, just print the money. It’s fairly straightforward to do. But we know if we do that, that’s like a tax because inflation is a tax. That’s also anti-growth. Then the third way out of this mess is to grow. That is the most attractive because even if you don’t increase It’s the tax rate, if you grow, the tax revenue increases.
That should be our focus. Indeed, I’ve been advocating over the last few years that all focus should be on growth, I’ve also been a strong advocate of the surge in productivity that will result from the widespread adoption of AI. Ai definitely has the potential And yes, you can look at the Economist studies that show a minor improvement in productivity.
That’s not what I’m talking about. We’re just at the beginning of the AI revolution. And what will happen in the future, in my opinion, will lead to much higher growth. And what we need to do is to return to the time. And historically, we’ve seen growth 5% to 7% in real GDP. China, for many years, had double-digit real GDP growth. Now we’re satisfied with 1. 9%, and Europe is satisfied with one, and Japan is satisfied with zero. No, we need ambition. The easiest way to put To put the fiscal house in order is to grow, and we should focus on that.
And yes, I do believe that AI will be a substantial contributor, and that will lead to additional revenues. Will it be enough, is not clear. There still needs to be some cleanup. It’s a difficult political system that we’ve got where the horizon is like 2-6 years. We don’t have that long term thinking, but I do think that something needs to happen. But again, the easiest way out of this is to grow. That should be the primary focus for our policymakers to make it as easy as possible to grow, and then the fiscal stress will decrease.
Monetary Metals:
Dr. Harvey, this has been a fascinating interview. I want I can ask you a question I end all the interviews with and asks my guests, what’s a question I should be asking all future guests of the Gold Exchange podcast?
Dr. Campbell Harvey:
I would ask them the following, that if you look at the history of commodities, you notice that the inflation adjusted prices decrease. And think of agricultural commodities, and it’s obvious why they decrease: mechanization, irrigation, better seeds, fertilizers, genetic engineering even. So we produce more at a lot less cost.
So I think that a reasonable question for your future guests is, when will the technological change kick in for gold. So what that means is a supply shock. And historically, we’ve seen shocks where gold discovered in the new world, and that led to significant inflation in Europe. There will be in the future supply shocks. And in my paper, Gold and Bitcoin, I detail two obvious supply shocks. And one of them is the potential byproduct of nuclear fusion, and that is to alter the nuclear structure of something like Mercury and turn it into gold. And indeed, this is in theory, it’s been done before.
But fusion, we can do it on a larger scale. And then second, I would ask about the obvious massive supply of gold that we have outside the Earth, on near-Earth, the asteroid. And what is the implication of that? I think that gold, we have a long history As I mentioned, multiple millennia.
We need to be looking out into the future and detailing these risks that are known risks, and the issue is when.
Monetary Metals:
Dr. Harvey, this has been a fascinating interview, and it’s been an honor to speak with you today. For the guests and the audience who are obviously going to be looking to get more Dr. Harvey, where can they read more of your work, read your books, and get more of your research?
Dr. Campbell Harvey:
The easiest thing is to go to my LinkedIn, and the second place you could go is my website, and just search my name.
Monetary Metals:
For those who had a fascinating experience like I did today with Dr. Harvey, make sure to check out the show notes, where we have a link to all of Dr. Harvey’s papers as well as his book. Thank you, Dr. Harvey, for the great episode.
Dr. Campbell Harvey:
Thank you.