Podcast: Play in new window
- Evidence Shows Silver’s Move To Be Just Beginning
- China Doesn’t Need U.S. – Who Will Loan The U.S. Money?
- Send Your Q&A Questions To [email protected]
“If you’ve got a trillion-dollar year-to-date trade surplus, the largest on record for the Chinese, and we haven’t even finished out the year, we have another month and we’re already breaking records. And yet, our trade with China year-to-date is down in the double digits. They don’t need us. There are other people in the world who will buy their stuff. And if they don’t need us as a consumer, they may not need our dollars and our Treasuries either.” —David McAlvany
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Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany.
Dave, as you know, in our meetings, as we get together as advisors, we talk about what are some of the questions that are coming from our clients currently? And so I think today would be a good day to let our clients be flies on the wall and just say, “All right. Let’s listen to each other’s questions and see if there’s something that maybe we’ve been wondering that hadn’t gotten asked.”
David: We typically have a couple of episodes at the end of the year which are just dedicated to that. And we always ask, “Send us what’s on your mind. What do you want us to cover? And what’s pressing?” So today is just kind of things that have already come in over the last week or two. Clients are saying this and that about the metals market, about the bond market, what have you. But we’re preparing for our annual year-end Q&A episodes, Wednesday, December 24th and 31st.
Kevin: Yeah. So we need our clients and listeners to send in the questions to [email protected]. So send any questions that you might have that you want Dave to answer at [email protected].
David: Yep. We’ll feature them across this special two-part program. And today is just kind of a—let’s pull the first olive out of the jar.
Kevin: Okay. Well, and I’m going to just start very simply. “Is silver too expensive right now?”
David: Yeah.
Kevin: Yes. What do you think right now, Dave?
David: Yeah. I think the context that was set by Michael Oliver a few weeks ago is an interesting one. First, by looking at M2 money supply growth, and seeing that it is one of the few commodities that has yet to go through a generational repricing. It’s happened to copper, it’s happened to lead, it’s happened to a variety of industrial commodities. Most recently it’s happened to gold, where we’re in a new price regime. Getting above $50 an ounce is getting into—we’re just launching into—a new price regime.
Kevin: You thought that might be a new floor someday. Yeah.
David: Yeah. So is it too expensive? It’s certainly more expensive than it was at the beginning of the year. We’re up over 100% this year. So you can’t argue that it’s cheap based on annual performance because it’s a lot more expensive. But I think when you look at the other economic metrics— And frankly, the way that silver performs relative to gold, that metric would suggest that it’s cheap. We’re sitting close to 70:1. And a 70:1 ratio in a bull market of metals— Typically, you take gold, divide by the price of silver. The numbers should be closer to 40:1. The normal range is 40 to 65 in the context of a bull. So the fact that we’re still at 70 relative to gold/silver—
Kevin: Still a little cheap.
David: Absolutely. And it has a lot of catch-up in terms of that ratio. So, expensive, yes. Too expensive, no.
Kevin: Okay. And you have talked about gold being under-owned—maybe expensive, but under-owned—which is a good thing to keep in mind. The general market, what Bill King calls the army ants, have not really entered this market yet.
David: That’s right. And I think when you consider the army ants, that’s where silver has a huge play because, frankly, if you’re going to a coin dealer or some sort of a purveyor of metals and you say, “For a thousand bucks, I can get a quarter ounce of gold”—actually less than a quarter of ounce of gold—”or I could have a tube of silver eagles”—well, probably not a tube of silver eagles at 60 bucks an ounce, but—
Kevin: Close.
David: You get a lot more than you would— And there’s this sort of pirate complex, like “I just want—” The quantity all of a sudden matters. And I think we’re going to see the retail investor play a huge role in driving the price of silver in ’26 and ’27, the two years in front of us. A part of that is, gold feels too expensive. And from the silver standpoint, the reason why we see explosive price moves ahead is because of the size of the market. It does not accommodate very many buyers without adjusting in price.
Kevin: It’s pretty thin. Well, that takes us to our next question then. Should I be selling my gold and buying silver, because everyone thinks it’s going much higher? What’s your thought on that?
David: The first reflection is, for what? I always look at the exchange value of gold. And on that basis, there are some things that are cheap relative to gold. The pea patch that I play in, the sandbox that I play in is in the equity markets. And that’s where we see a reason to wait because your purchasing power, your gold purchasing power relative to the S&P, relative to the Dow, that’s just getting into gear too. Call it 11-1/2:1 on the Dow/gold ratio at present. We think that that trades to 3:1. So would I sell gold to buy equities today? No.
And again, I look at the exchange value. Would I sell gold to buy a house today? No, I wouldn’t either because you’ve got high prices in real estate. You’ve got high prices in stocks and bonds. Would I sell gold to pay for tuition? Yes, I would. Oh, in fact, I am. I have tuition to pay. In my inbox is yet one more notification that we’ve got the next quarter’s tuition coming around.
Kevin: Oh, that’s painful. I have two clients in the last couple of weeks who sold some gold, they did very well in it, for cattle because they’re ranchers. And they see that cattle is a little bit like gold that walks around on four legs. And so that would probably be a reasonable trade as well, wouldn’t it?
David: Exactly. And one of the websites that I’ve used for years is pricedingold.com.
Kevin: Pricedingold.com.
David: Sir Charles was on our commentary probably 12 years ago. And that is a useful resource to be able to see what things cost in gold terms. And again, I mentioned college tuition. If you look at a Yale University education priced in gold today, it’s about as cheap as it has ever been.
Kevin: Isn’t that amazing?
David: So you may think, “Well, my word, $80,000 a year,” whatever the number happens to be.
Kevin: But priced in gold—
David: Priced in gold, this is about—
Kevin: —it’s a bargain right now.
David: Right. Real estate, not in that same boat. Real estate is still relatively expensive. Stocks and bonds, still relatively expensive. So if you’re looking at it for the purposes of investment, I would say hold off because your better exchange value is still on the horizon.
Kevin: Okay. So let’s go. You said stocks and bonds are still expensive at 11:1. So let me go to this question. “If I use the Dow/gold ratio as a measuring stick to track gold’s value, it’s not hard for me to see a time when 3:1, with gold at $8,000 and the Dow at 24,000. What do you think it looks like when we get to 1:1?” Now, that’s the question as it was written down, but Dave, I think of Pierre Lassonde, who you had spent some time with a few weeks ago. Was he calling 17,250 for the Dow, 17,250 for gold? He was talking about a 1:1, wasn’t he?
David: That’s right. He’s talking about a 1:1. What does it look like? It looks like all the leverage has come home to roost. It looks like the overextended balance sheets are now punishing. And it’s reflected in share prices publicly. It looks like 401(k)s and IRAs that have been on autopilot and on target date funds, they have just finished the proverbial meat grinder.
Kevin: With no buyers.
David: Right.
Kevin: The empty space.
David: And that’s how you get to those values. That’s how you get to those price levels where people have thrown in the towel. What we’re suggesting is that when people have a reserve in gold, the world is your oyster. And there is a moment, there is an opportunity to make a lateral move into productive assets, the best companies in the world that are selling at reasonable prices once again. And at a 3:1, you’ve got a compelling value proposition. At a 1:1 ratio, it is a table-pounding proposition.
Kevin: Okay. So this question: “Why did JP Morgan move its gold trading desk to Singapore? With the Fed officially ending QT, what do you think happens next?” So those are really two questions. But does the JP Morgan move, does that have anything to do with what we’ve seen with the Shanghai Exchange and just that move over to Asia? What’s the thought there?
David: Yeah. I think that London and New York are still the center of the precious metals universe, but there is a migration. And a part of that is we have understated statistics from the central bank in China. And they’ve been buying a lot of gold. Well, if they’re buying, somebody’s selling, somebody’s transacting, somebody’s handling those transactions. I do think that JP Morgan wants to be closer to where the action is going to be. So as we see a geographic migration, it’s going to hit London at the margins, it’s going to hit New York at the margins. I think they’re still important, but I think Singapore, Hong Kong, Shanghai-
Kevin: Shanghai.
David: —these are the future centers of gold trade.
Kevin: Morgan Lewis has pointed out that the gold recycling is replacing dollar recycling. And the idea behind that is people are buying their oil in yuan, Chinese yuan, but they can’t really do a lot with that Chinese yuan. So they’ll convert it in Shanghai to gold so that they can internationally trade.
David: Well, so think about the importance of Singapore in terms of global trade. It is this city which is basically a commodity trading hub. In terms of goods and commodities, it is one of the most important cities in the world. If we are moving from dollar recycling to gold recycling, you look at where transactions, where invoice settlement can occur, and Singapore is center of the map.
Kevin: Really? It’s that important?
David: Oh, yeah. For Asian trade, absolutely. I’ve spent enough time in Singapore to see the boats going around the Straits of Malacca. And you’re talking about all of Asian trade going to the rest of the world. Not only is it a critical geographic point, but also the city and all the banks and financial institutions that are there, it is one of the most sophisticated trading hubs in the world. And so it makes sense. And of course, this is inference. But if we are moving from dollar recycling to gold recycling, why would you not have a metals trading hub in Singapore where you already are trading so much in terms of commodities and goods and whatnot?
Kevin: Well, bringing commodities up, one of the questions that we were asked a couple of weeks ago from a client is: “The commodities index has doubled since 2021.” This is fairly short order. “Going forward, where do we see commodities relative to financials? Do you think they’ll still outperform?”
David: I think they do outperform. I think you’re also looking at a doubling off of COVID lows. And that’s worth keeping in mind because silver, if you’re counting a negative number on Cushing crude versus the current $60 price, has it quintupled? But at $60—
Kevin: Yeah. Went negative, you mean?
David: Yeah, yeah. But at $60, it’s still cheap, all things considered, right? So yes, it’s moved up in price, but certainly it’s not the $140 that it traded to. And the BCOM, the Bloomberg Commodities Index is still half its recent high of the last commodity cycles. So it does have a lot of room to move. You’re looking at financials being stretched, extended as high as we’ve perhaps ever seen them in terms of valuation metrics, and commodities which have been ignored—ignored for a decade.
Kevin: Right. So under-owned again.
David: Yeah.
Kevin: Still. Okay. So this does bring up a point, though, because you talked about the lows that we had in COVID. If we were to go into an extended recession or depression, where a lot of times you have deflationary forces hitting, the question reads, “how does gold and silver perform in a depression, a recession?” And then shift that over to an inflationary or hyper-inflationary environment. What’s your thought first? If we were to go into a major slowdown period, how does that affect the metals?
David: Well, I think this is where you have differentiated behavior because over on the one hand is both industrial and precious. It is a monetary metal. Gold is almost exclusively a monetary metal., Very limited industrial demand. Of course, you’ve got jewelry demand, but that’s a different factor. Move into a recession, move into a depression and you probably have less people who are putting solar panels on their roofs, particularly if there’s no subsidy for it.
And so the fact that 20% of the silver market today is going to solar, you’re going to have to fill that gap with investor demand, otherwise the price is vulnerable. So in the context of a depression, in particular, I think silver, this is where you may be playing for more upside gains in a silver position, but you also have more downside loss potential because of its industrial nature.
Gold is interesting because it is sort of a commodity subject to pressures on the front edge of a de-leveraging, but in the context of deflation actually does pretty well. Roy Jastram’s book The Golden Constant put the math at about 250% gain in purchasing power in gold in the context of the Great Depression. What you tend to see is that it holds more of your value relative to other assets. Even if it were to decline relative to other assets, you’ve got far more compression in those others. And so you do maintain a significant advantage in terms of purchasing power and a migration to those other assets at some point.
Kevin: And so what you’re saying is if gold went down by half and everything else went down 90%, you’re still gaining buying power with the gold. This is where that relativity is so important.
David: Well, I also think that when you’re looking at gold, you’re looking at an asset that is free of counterparties. And in the context of deflation and depression, you are talking about a loss of value in financial assets. And of course, there’s claims and counterclaims on all kinds of financial assets. The hypothecation, the re-hypothecation, the slicing and dicing into derivative products. All of these things put gold in a very unique position. It is a repository of wealth. And so in the context of a deflation in other assets, people do look for something that is quite secure.
In past periods, you could consider Treasuries as a safe haven and cash as a safe haven. This is a unique environment where we could, theoretically, in answer to the question, move into a deflationary cycle. And yet, where do you go for safety? Because what the Treasury Department has told you is they’re going to do everything to support the administration in driving a very hot economy.
And what the Fed is telling you, and as we certainly migrate towards a more dovish bench there on the Fed board, I think you’re talking about a nasty outlook for the dollar and a nasty outlook for Treasuries. And certainly, from a technical perspective you can make the case that we’re getting ready for a next leg lower in Treasuries. That’s higher yields, lower bond prices. In that kind of context, where do you go for safety?
So that’s where I think the safe haven aspects, the insurance aspects really are a differentiating factor or factors for gold versus silver. You got to have both in the mix. One gives you a little bit more horsepower in terms of growth, but one gives you certainly a lot more, “I’m sleeping tight at night.” That’s the role that gold has had.
Kevin: Well, and you talk often about how the Trump administration and Scott Bessent, actually, they have been fairly open about the fact that they’d like to see a lower dollar. So that takes me to another question that clients have asked recently. And I’ll just read it to you here, Dave. “If we’re truly in a monetary regime change globally, and assuming that the dollar isn’t going to just disappear, what are the practical implications for the dollar and the US economy if, when the regime change happens, the dollar is still around? What do we see for the dollar if it’s not king dollar?”
David: Mm-hmm. Regime changes take place over long periods of time. And you could argue that when the British pound was devalued in the ’20s, that was a first significant move in the direction of the US dollar and away from the British pound, but it wasn’t the final nail in the coffin. That took until 1956. And it was not just a financial issue. It was also a military and geostrategic issue. When it was clear that the British could not control Suez, it was clear that they no longer had the power to back the currency.
And so while we tend to look at things through the lens of assets and liabilities and ability to pay on debt, current interest rates in a very fragile bond market structure, and that being sort of an accelerant or an exacerbating factor for dollar decay as the world’s reserve currency, there are other factors. What is the substitute today? We don’t have a substitute. We are decades away from the Chinese or the Europeans having some sort of an alternative solution. And so we have some incumbency advantage.
Obviously, if we got into something that was the equivalent of World War III or World War IV, if you diminish our military might, ultimately you’re diminishing the ability to defend our role in the world in terms of a trade partnership. And thus, you see real significant dollar decay.
Kevin: And I want to ask you a question on that because we have spent our entire adult lives watching our military protect our dollar monopoly on petrodollar. And we have found, over the last three years, a loss of about 20% of that oil trade to other currencies. And that’s where the gold recycling comes from. So do you think that militarily we’re going to continue to protect that petrodollar complex? Or do you think we’re purposely transitioning away?
David: Well, I think there’s even more factors than that. And it is, who do people want to trade with? And can they work around us anyways? Where, whatever our military might says, through trade negotiations, we’ve implicitly lost. I think a good indication of that is the most recent trade data from China. If you’ve got a trillion dollar year-to-date trade surplus, the largest on record for the Chinese, and we haven’t even finished out the year, we have another month and we’re already breaking records. And yet, our trade with China year-to-date is down in the double digits. They don’t need us. There are other people in the world who will buy their stuff. And if they don’t need us as a consumer, they may not need our dollars and our Treasuries either.
Kevin: Which means they don’t need to loan us money to buy our Treasuries, just like the oil-producing countries with this new dollar recycling turning to gold recycling, they don’t need to loan us money either.
David: Yeah. I think you’re hitting on something very important, that the key transition away from the dollar is the key transition away from the US markets as sort of the consumer destination for consumer goods and things of that nature. So as trade shifts, demand for the currency unit shifts. And I would be afraid— If I’m the current administration, I’m afraid of what’s being evidenced in the recent Chinese trade data.
Kevin: Wow.
David: It suggests that we are—
Kevin: We’re not needed.
David: —not needed. So we think we’re negotiating from a position of strength when in fact somebody has a better alternative and they’re exercising it and it’s already showing up in the numbers.
Kevin: Well, and we’ve needed them to loan us money for the last 40 years. That’s how this whole thing has worked.
David: Certainly the last 25 years.
Kevin: So I’m going to go to a question here that we had from a client recently. Yield curve control. Okay. “So we have to raise our interest rates to get people to loan us money. Do you see yield curve control becoming a real thing here going forward? If they’re not loaning us money at the interest rate that we’re paying, we’re pushing 40 trillion in debt, where are we going to get that?”
David: 2026 and 2027, I think yield curve control is a given, in part because we’ve got the interest component on the national debt which is already unmanageable. So if you’re not driving down yields at the short end of the curve, you’re in real trouble. We talked about this earlier in the year, where we were at 19 to 20% of all tax revenue going towards an interest payment. That’s not principal payment. You’re not getting rid of the $40 trillion gorilla that’s on your back. You’re just keeping the clock going, right? And that— 20% to start the year, right?
Kevin: Yeah. Wow.
David: So where are we at the end of the year? Where are we at in ’26 and ’27? There’s going to be pressure, upward pressure, in yields, which is unaffordable for the Treasury. It will require them to manipulate yields lower on the front end of the curve.
Kevin: Which is inflationary, right? When they go in, and whether it’s quantitative easing or some form of printing money, it still is us creating money out of thin air, isn’t it?
David: Yeah. I’m not sure I buy into the idea that you can sterilize these activities. I think we have a replay of the 1970s, where debt monetization feeds the inflation beast and accelerates it. And it’s going to come as a surprise to the academics because they’re assuming they have more control than they do. They have this theoretical thing called sterilization, like, “Oh, well, we can print as much money as we want. It’s not going to be inflationary.”
Kevin: Do you remember when we had a central banker—
David: Tell that to the consumer.
Kevin: —tell us that? He said, “We’ll just sterilize it.” And it’s like, “What do you mean by sterilize it? How do you do that?”
David: Well, and coming back to the comments from Michael Oliver a few weeks ago, watch M2 money supply. And it’s going to tell you the direction of the dollar. Watch M2 money supply. That’s going to tell you ultimately the direction of commodities in general, gold and silver in particular. So watch what the markets are doing and how they’re adjusting to the reality. What the administrators of the system say is a lot less important than, A) what they do, and, B) how the markets react to their actions. More important, I think, than their words.
Kevin: Okay. So to repeat, if you like this format, send us your questions. The last two programs of this year we will answer those questions, very similar to the format that you’re hearing today.
David: Please keep the questions as concise as you can—
Kevin: Oh, yeah.
David: —so it doesn’t take five minutes to read the question before we get to the answer.
Kevin: Maybe a sentence or two.
David: Yeah. Perfect.
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You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany. You can find us at mcalvany.com. And send those questions to [email protected].
This has been the McAlvany Weekly Commentary. The views expressed should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional financial advisor to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany Weekly Commentary.
