Podcast: Play in new window
- Indian Gold Demand Rises 60% In Year
- Eastern Gold Buyers Buy Value, Western Buyers Chase Momentum
- Gold Exploration Budgets Double, Yet There Are No Recent Large Gold Finds
“We’ve been at this place where apathy and complacency with the gold market in the West is on display. In the East, every opportunity to buy cheap has been taken advantage of year after year after year. And if you give them a chance to do it again today, they’ll do it again today. Where are we? Fat, dumb, and lazy. Ignoring the obvious, the crowd of elephants in the room: overvaluation in the stock market, unsustainability in the debt markets, a rollover of massive quantities of debt at higher and higher numbers. You think a trillion dollars in interest is tough? Try a trillion and a half. It’s coming to a theater near you.” –David McAlvany
Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany.
David, you’re recording remote, but it sounds like you’re just right here in the studio. You’re in Atlanta right now, aren’t you?
David: That’s right. I got to spend some time with family last night, which was absolutely fantastic. A cousin that lives here in Atlanta and her husband, a nobleman, I think of him as noble. I think anyone who has a perfect British accent, you could confuse for royalty. They speak, after all, the King’s English—or the Queen’s English, as it were. We had a fascinating conversation just on how quickly life goes by, how short it is and how important it is. And it reminded me of the conversation we had a few weeks ago, Kevin, where we talked about investing in scarcity.
And when you do invest in scarcity, one of the things that you prioritize, I think by the nature of it, is in relationship. It’s one of those things that we just don’t have a lot of. If you think about the holidays in particular, in a 90-year span, how many more Christmases will we have? For me, that means that there’s only a certain number of times that I’m going to make cinnamon rolls with my sister, ever. And I can count those on a certain number of hands. And so whatever your tradition is, however you prioritize time and relationships, recognizing the finitude of our lives and how important it is to invest in scarcity, I think that was one of the reminders from the conversation I had with family sitting by the fire yesterday.
Kevin: Dave, you wrote the book Legacy a few years ago, trying to get people to focus on value. And of course, it’s no comparison when we’re talking about making cinnamon rolls with your sister versus gold, but value, whatever it is, is found in scarcity. You brought up a British accent. I think about the benefit that we had as a company. We’ve been around now 51 years, the McAlvany company, but I remember in 1998 and 1999, there was an unusually high amount of volume or demand for small tradable gold coins here in America.
And at that same time, Dave, you’ve been to London many times. I’ve only been a couple, but I remember, whenever I’m in London, seeing everything was gilded with gold. The age-old gold, the British sovereign was the currency of the realm 100, 150 years ago. And you remember when Gordon Brown, back in the late ’90s thought that gold needed to be sold for currency. He hit the exact bottom of the gold market, and he supplied us with just millions and millions of dollars worth of gold that we needed over here. I think he was probably wrong. I mean, how much gold did he sell out of the Bank of England’s vaults at the very bottom of the market?
David: I’m reading a book right now by Gordon Brown. It’s actually co-authored by Gordon Brown and Mohamed El-Erian, and the title of it is Permacrisis. It’s a fascinating thing because they presume to show or demonstrate how you can, more or less from a top-down standpoint, manage through every crisis you can imagine into the future. And I think back, and I think, wouldn’t it be nice if the Brits had the gold that Gordon sold? Gold has risen in fits and starts since 1999, and that was the period, 1999 to 2001, in what is said to be the generational low or what derisively is known as the Brown Bottom.
Gordon Brown liquidated 395 tons of British gold at an average price of $275 an ounce. He raised just under $4 billion because you can do better with paper assets. You don’t need to have this relic of a bygone age. So there’ve been distinct moves higher and lower for the metal over the ensuing 24, 25 years. Each trend lower found buyers in the East, and each trend higher, as we’ve gotten to interim peaks, it finally found buyers in the West. And that is the joke, that’s the truism which has come to be commonly understood, Asian buyers set the price floor, Western buyers the price ceiling. I guess it’s down to this. Cheaper prices attract a value audience and higher prices draw in the momentum trade, the panicked late-stage trend purchase.
So no wonder the audience of Asian buyers continues to like gold. They buy it right, and they sit on profits. So the Western buyer tends to hate the ancient relic because, with remorse, they look back at every purchase as being too high, too high, too high. It is funny. We often think about, the emotional nature of the trade dictates that sort of late timing, but the prices paid, you can understand why there’s little wiggle room for expectations amongst the Western buyer. When you’re routinely late to a trend, there’s not as much wiggle room on the downside.
Kevin: I have to smile though because, talk about being just absolutely wrong on a trade, when Gordon Brown was selling us gold that we could put into our client’s portfolios 24, 25 years ago, at the very bottom, I mean he got $4 billion out of that vault trade. He can’t have that back because today that would be what? $24 billion dollars, about six times the price of what he liquidated that for. But I think we have to be careful, too, because when we talk about bottoms, we can look back at $275 and go, well, gosh, we’re a lot higher than that right now, but could we be experiencing a new bottom, Dave, or the building of a new foundation?
David: It’s interesting, just thinking back to that period of time because I look at client portfolios on a routine basis. And when I see British sovereigns, which, again, as you’ve mentioned, we sold millions of these coins. When I see British sovereigns in their portfolios at an average cost basis of $65, $68, $72, $75, $80, we were at $250, $280 an ounce. And what is basically a quarter of an ounce of gold was flat dirt cheap. And that phrase, “you couldn’t give them away,” they were basically being given away. Gordon Brown did not want them. And they came to us. They came to us. And so we were grateful. One man’s trash—in this case gold ounces—is truly another man’s treasure.
And here we go again, only this time there is a surprising element. I’d say the difference— If I think about that East-West divide and the Eastern audience buying at lows, the Western audience buying at highs, you might think that gold trading at all-time highs this week that the Western buyer is present, that there’s a big footprint in the marketplace from the Western buyer, and now, at higher prices, the Eastern buyer is absent. And you could be asking the question, aren’t prices dangerously high and unsustainable at $2100 an ounce? I’d say clearly not this time judging by the traffic patterns. And there’s a lot of interesting tell. There’s a signal there, if you will, if you’re looking at the traffic patterns.
Kevin: And so, just to reiterate, the Eastern buyer seems to buy for value in long term, and they set a bottom. The Western buyer jumps in when there’s a momentum trade. In the West, we’re so spoiled in so many ways, we don’t necessarily have to chase value. It’s been a long time since we had to. But the Eastern buyer, I think about April of 2013, Dave, you remember that manipulation in the market? Goldman Sachs and Merrill Lynch just sold tons and tons of gold into the market on the futures contracts, knocked gold down a couple of hundred, actually 300 by the time we were done. But the Eastern buyers were very, very active. When gold went down, we found out a lot of that gold, I think it was about 700 tons that became available, went over to China. What does the Western investor miss that the Eastern buyer actually sees?
David: Well, one of the things that they miss is the seven, eight hundred tons which migrated from the ETFs in that 2013, 2014 timeframe and migrated to Asia. It’s never coming back. It’s not coming back. So if you think it’s as easy as clicking the button on your mouse to purchase, you may have that privilege today, but not forever. The Eastern investor found gold very attractive in 2023. Most of this year, that’s what you’ve seen. And that’s as Western investors have been dumping gold. This is true on a year to date basis, $6 billion year to date, 96 tons of gold from the ETFs in the third quarter alone.
So the Western buyer, if you’re thinking they’re lined up and this is why prices are at all time high, it’s no, quite the opposite. We’ve been exiting because there’s other things on our mind. What set the stage for stepping over the 2100 mark was the opposite. The Western buyers are preferring Apple and Nvidia and Microsoft. They don’t want kilo bars and Krugerrands and American Eagles, the Western investor has these dreams. And those dreams take flight with the possibility of price earnings multiples stretching from 40 years to 60 years to 115 years. That’s Nvidia’s price structure today. You’re paying for 115 years worth of earnings. And if that smells like burning wax, you could say that the top seven names are a little bit like, in terms of their earnings profile, a little bit like Icarus flying a little too close to the sun. These are not sustainable price earnings multiples.
Now, the market cannot be convinced of that. Quite the opposite. They believe that the multiples will expand from here, profits will explode, et cetera, et cetera. But again, the Eastern investor found gold attractive in 2023, the Western investor dumped 96 tons, cumulative over $6 billion year to date. We are not in. We’re getting out. We’re getting out for higher yields. We’re getting out for higher returns in tech-centric S&P allocations. That suffices in the West, chasing the momentum trade to valuations very rarely seen in market history. You’d have to go back to 2007 and 1999, 2000 for comparable valuations. Fred Hickey highlights a number of the World Gold Council data points. Again, underscoring the traffic patterns.
Kevin: Well, I’m thinking about Henry Kissinger. Henry Kissinger died at 100 years old, and diplomacy was his specialty. How do you deal with the world sometimes in an unconventional way? And of course, people have different emotional reactions to some of the decisions that came out of the Kissinger years. You even, Dave, wanted to interview Henry Kissinger before he passed away, but we missed that opportunity. But I think about how diplomacy actually occurs. Sometimes it occurs with guns. Sometimes, however, it occurs with central bank policy or Treasury. Remember Juan Zarate’s book.
So diplomacy and how the world all holds together harmoniously has a lot to do with how money flows, not just how the military flows. And I’m bringing that up because central banks are the banks of each government around the world. And their gold buying patterns changed pretty dramatically after 2008. Instead of being gold sellers, which means that they would’ve put the importance on paper, they became net gold buyers. So it’s not just the Eastern buyers, the central banks have a play in this, don’t they?
David: Absolutely. And that’s where you see the sort of strong floor even reinforced more. Not only do you have the Asian buying, both Chinese and Indian buying, but you also have the central banks, which have decided that the world order is changing. And you can’t discuss the world order without discussing Kissinger. Somebody was asking me the other day what my thoughts were on Kissinger, and I said, “I went through Niall Ferguson’s biography of Kissinger twice, and I can’t remember anything.” And a part of that’s because I listened to it while I was training for the Ironman. And I don’t learn with an auditory. That’s not how I learn. I need a pen and paper in front of me.
Kevin: Marginalia.
David: Exactly.
Kevin: You like to write in the book.
David: And I could say Metternich, Kissinger was influenced by Metternich. Well, how? Well, I don’t remember. There’s a vague familiarity with Metternich. And so this is the Austrian diplomat, Prince Klemens von Metternich. And who was he? Well, like Kissinger, secretive, tragic, manipulative, Machiavellian. This is the world of Kissinger. It’s a world of changing power structures, competing interests, brute force. And if you want to know some of the subtext for the gold market today, it has to do with these things.
Gold prices have been buttressed by central bank demand in the same time frame that we see Asian buying increase. It’s a compelling motivation for a growing part of the world, and it’s a motivation that is not going to quickly go away. This is the de-dollarization theme. This is the secure-and-control-your-reserves theme that continues unabated. The dream is simple. It’s to operate autonomously from the U.S. Treasury Department. When you read Juan Zarate’s book, Treasury’s War, and when you see how powerful the U.S Treasury is in directly influencing global foreign policy objectives—even more so than the State Department, in essence managing global purse strings, you can appreciate the desire for space between us and them. You can appreciate this move towards gold ounces as a way of insulating the national balance sheet from the balance sheet that the USA has sought to influence and control. Gold in that sense is an opt-out from a dollar-centric world.
Kevin: Okay, so we’re talking about the East, we’re generalizing here, but the East can be Turkey, it can be India, it can be China. I think about India, remember six years ago, Dave, because your mom and dad helped with several orphanages in India, the shocks that can occur where a person would say, “Gosh, I wish I would’ve just had gold.” Remember when they made the 500 rupee and 1,000 rupee note illegal? You had to actually turn them in and set up a bank account, and they were being phased out. Well, that kind of shock you have to prepare for. Think about China. What are some of the motivations right now? If you were Chinese, why would you be buying gold?
David: Right, so if you add to central bank buying this surge in investor demand, I think things get really interesting. And China is the epicenter of investor demand today, and that can spread, of course, outward towards the periphery. But if you go to the heart of Chinese demand, 82 tons in the third quarter from investors—this is not central bank demand, this is investors—in the form of coins and bars. That’s a 66% surge when you’re comparing one quarter versus the previous. It’s a 16% increase when you’re comparing the year-to-date numbers for this year versus the previous year. So quarter-on-quarter and year-on-year, significant increases. These are being reported by the China Daily.
And there is for a Chinese investor, I think, a trifecta of concern, and that starts with real estate. This is the most popular asset in China. This is what holds the greatest amount of wealth in China, and this is where you have an implosion which has been going on now for the better part of a year and a half. The unwind of one of the great real estate bubbles is unfolding daily in the collapse of the entire real estate developer segment in China. This is developer debt obligations. Can you imagine this? Bonds with yields stretching over 700%—
Kevin: Wow. Per year?
David: —with equity of those companies worthless. Yeah.
Kevin: Wow.
David: Equities worthless, debt is pricing insanity. That’s not a good investment. That’s just a telltale of something that has imploded. These companies represent trillions in obligations, estimates of $12 trillion in obligations, which are in the process of foundering. You get a number of shadow lenders—this week, as a matter of fact, one of them is going under, merely this week’s example of an implosion, twice the obligations owed to assets remaining—over 60 billion in debt, under 30 billion in assets. And I thought it was interesting, the Financial Times was asking the question: where did their top two executives disappear to? Well, this is justice, Chinese style. If you’re going to mismanage a business, you just simply disappear. Chinese officials would probably, this week, like to make Moody’s analysts disappear as well. I’m sure you saw that Chinese debt was given a negative outlook by Moody’s, just in the last day or two.
Kevin: Well, and it’s about time. Let’s face it, Chinese debt is in trouble, but the stock market, talk about a gag reflex. The Chinese equities market, if I were looking at stocks or gold if I were Chinese, I think I would lean on the gold side there as well.
David: Exactly. The trifecta includes the real estate market being under tremendous pressure. Then there’s the vast underperformance of Chinese equities. The Chinese stock index, the CSI 300, very much like our S&P 500, it’s trading at four-year lows, and this is an index that covers the largest cap-weighted companies from Shanghai and Shenzhen.
The market malaise in Chinese stocks stands out like a sore thumb when you consider the uniformity of equity markets moving higher everywhere else. The CSI 300 has been left behind. That may be because of the third element which factors into Chinese gold demand, and that is you’ve got global geopolitical instability, and so there’s your trifecta. I guess to these three, I might also include the oppressive state, and this won’t be popular, but Xi has decided to take a different road from his predecessors in consolidating power and extending his rule to a third, maybe you could call this the forever term. How would you respond if you were living in China? Does it not make more sense to have private and portable assets, a quiet and portable asset, as the state loses your confidence, as the state becomes more rapacious, as the state becomes more intrusive, as the state becomes more desperate? Don’t you want a few more ounces in something that can go into a suitcase or under the floorboards? I think actually you do.
Kevin: So Dave, I bring back India, because six years ago when all of a sudden we had that situation where you had to turn your cash in and have it become a bank account, there was a limited amount of cash that could be turned in per day, if you recall. And the orphanage that your mom and dad were helping at, I think it was 180, 190 kids, it took more money than they had. So, gold was a good option at that time, because you could at least trade gold for currency or trade gold for food. So, India, China’s looking at all these things, but India is another very large country that understands gold, value in gold.
David: Isn’t it funny that financial inclusion is really the elimination of options? It’s a narrowing of the field. Financial inclusion; join us and lose your options. China is just one of the eastern giants hoovering up ounces from the global supply of gold. Indian consumption is also right there. Why is that the case? These are two countries that account for the greatest percentage of the human population, and culturally they love gold.
So gold is highly sensitive, from a demand perspective, to demand dynamics in China and India, and in consumption of coins and bars—and coins and bars, that is a subcategory of demand if you’re talking about retail consumption, because obviously jewelry is a part as well. Just for coins and bars, you’re talking about 55 tons in Q3. That’s the highest third quarter buying in over eight years, and Q4 continues to be strong in India. October total imports were up 60% year-over-year. That was a 31-month-high, and you’re in between some significant holidays. Diwali, demand was very strong this year, and in India, again, we often refer to India as the love trade, and that’s because of the time of year this is; the wedding season, post-harvest, and gold is given as gifts as a very traditional thing to do within the culture. So, Chinese and Indian retail demand alongside central bank demand has been powerful. Again, the grand irony, that’s even as western investors are exiting.
Kevin: Yeah. And you know what they’re exiting into. It’s funny how we do, here in the West, we chase the shiniest new object, whether it’s artificial intelligence, maybe it’s some new cryptocurrency that some star decides to call their own, or whatever, you name it, but we chase the shiny object while the Easterners— You haven’t mentioned Turkey, but Turkey is also a big buyer right now.
David: And this has been true going back hundreds of years, the Ottoman Empire was very interested in metals, and now, in its current form, Turkey has prioritized the trade of gold. They do have some significant mines in Turkey, and year-to-date imports, in addition to what they create, year-to-date imports have already exceeded any full-year record. The record was set back in 2020, and we far exceeded that already on a year-to-date basis.
Kevin: But there’s a contrast there. Do you see the contrast, Dave?
David: Oh, absolutely.
Kevin: Yeah. You’re pointing this out.
David: Yeah. It’s the tectonic global shifts which are occurring both in the currency markets, in that de-dollarization theme, as well as in the global bond markets where we’ve pushed things beyond what the global economy can handle in terms of debt that is needing to be serviced. The West, as you mentioned, remains fascinated with the newest shiny object. It doesn’t matter what it is. Is it AI? Is it some other form of technology exceptionalism? In the East, they see the importance of the oldest shiny object, while we’re the ones fascinated by the newest shiny object. And it’s in the East that I think they appreciate that gold is simply a form of wealth that endures. It endures regardless of political regime. It endures regardless of growing cross-border discord. It endures regardless of paper asset values. And that contrast is amazing. That contrast is amazing. The price floor setters see the world in long time frames and through the lens of value. The investor that puts in the top, in the gold market in particular, imagines only blue skies, doesn’t see the need for gold until it’s very late in a particular trend. They are dreaming of the infinite, and they’re not thinking of that which is scarce. So, I think the US or the western investor tends to suffer from extrapolation and ignore some critical numbers.
Kevin: After three and a half decades of talking to investors, Dave, there seems to be two types of investors, and we all have parts of this in ourselves, so we have to be careful. But there are two types of investors that come along that I know are not going to keep their money for long. One of them is they don’t want to do any thinking themselves. They just heard that this was a really good financial money manager and they want to hand it to them and ignore economics in making any decisions themselves. That’s a losing strategy. But the other type of investor is the person that you’re talking about, like in the West here, where you see them selling when they should be buying. You see them buying when they should be selling, and they do it over and over until their money’s gone.
David: You did it to yourself. That’s the indictment that could be made of the US investor. Why did you buy high and sell low? You did it to yourself, and you did it not only once, but you did it a dozen times. If you look at a portfolio over a 20-year period, if I talk to investors, and this is a part of what we do every day, I hear the story over and over again. Tech wreck, I sold out in 2002 and I bought back in at 2007. I sold out in 2009. I bought back in 2016, ’17, ’18. They miss the big moves higher. They capture all the downside, because they buy high and they sell low. They do it to themselves because they can’t control their emotions. They don’t realize how influenced they are by feelings and how little attention they pay to the math.
And for me, perhaps the numbers are speaking to me most of all right here and right now, just counting the investors, the investors in the West exiting the metals market for the majority of 2023, those investors will be back, and if you know anything about markets, you only have a certain number of buyers. When you run out of buyers, you run out of price movement. When you run out of sellers, that represents a change in direction. So you can have prices move lower, and when you run out of sellers, that is the end of the downtrend. Now you have an uptrend in front of you. When you run out of buyers, that is the end of the trend. You now have declines in front of you.
The central banks are today a reliable source of demand. There’s no more Browns in the mix liberating ounces from the London vaults. There is a move on, globally, to offset US Treasury pressure, to mitigate the coercive experience of dollar hegemony. That is the bias among central bankers. There is a move on to wrest control, to repatriate assets into a form that no one can steal or redirect. So count the number of western investors leaving the gold market—and this is encouraging to me. It’s very encouraging to me, because these are investors that, out today, will be in tomorrow. Some will be back. Others may never own gold again, but there will be new entrants into the gold market, even from the western space. Frankly, very few people today, if you’re talking about professionals, actually are allocated to the metals.
Kevin: That’s one of the things that I found is consistent. When somebody talks about their broker managing their money, I’ll ask them; “Now, do they have a place at all in their portfolio for gold?” And if they go back and ask, oftentimes they’re shocked that there’s either zero or very little recommendation for gold.
David: Yeah, they have a place for it. It’s in the joke box, it’s in the trash can, the round bin. They file that idea away very neatly. Bank of America global research demonstrates this clearly; 71% of investment advisors have 0 to 1% gold exposure of any kind. Only 2% of investment advisors have 5% or more of an allocation to gold. What I’m saying is that gold is under-owned in the West. When I say the numbers speak to me, I mean that markets are driven by buyers and sellers, and precious metals are far from exhausting the numbers. Again, the number of remaining buyers is huge. We’ve barely started, certainly in the West.
Kevin: Okay, so now we hit, on Sunday night, Dave, a new all-time high on gold. You’ve brought up the Eastern buying, but there is a point where the Eastern buying, are they going to back off a little bit? They’re not price chasers like the West, are they?
David: No, but they are a little bit price sensitive as things get, in their mind, above what they’ve been paying recently, so investor demand in the East will likely ease. They don’t chase the price.
But the setup is classic. As the Eastern investor settles in and waits for any lower price to pounce on, the Western investor returns, paying the higher prices, a bit late but with liquidity to drive the price nuts. So we’re on the edge of nutty price moves. I don’t think that 2,100 is a nutty price. Western-driven nutty price moves are ahead. In fact, I like gold at 2,000. I like gold at 2,100 because that has been the ceiling since 2011. And this is now a 12-year consolidation in price. 12 years of that consolidation is being resolved to higher levels. A breakout from that 12-year consolidation redefines 2,100. Now as a multi-decade old floor, what has been a ceiling now becomes the floor. Think about that. Consider that your imagination may at this point have insufficient space to see a price level sustained over 2,000 an ounce.
Kevin: That’s one of the things that is tricky, our imaginations. There are things that we’re experiencing right now, Dave, that 10, 20, 30 years ago, I really could not have imagined at that time. And you have to be able to say, “All right, is 2,100 a little bit like what 275 or 252 was, $252 an ounce, 25 years ago?”
David: I think it’s a little different. I think 2,100 is a little bit like 400 or 600. 2,100 is not the cheapest price, but it’s also not the end of the range either. Oil never traded to double digits. If you go back in time and think about the oil markets and the use of imagination in engaging with commodity pricing and supply and demand, oil had never traded to double digits. So who could imagine triple digits if you’ve never even seen double digits?
Prior to July of 1973, oil had never traded over $4 a barrel, $4 a barrel. That was a stretch. By the end of 1974, it was over 10. So it flipped to double digits. Six years later, by 1980, it was around $40. So from 4 to 40, a tenfold increase in less than a decade was unimaginable by anyone who in 1971, ’72, ’73 was looking at $1, $2, $3 a barrel.
I started at Morgan Stanley, Dean Witter, and oil was $12 a barrel. There was one broker I worked with. He was a classically trained violinist. Pulled me aside, shared a few technical charts with me, and he made the case for oil trading over $100 a barrel from 12. And granted, I was incredulous.
Kevin: Hard to imagine, yeah.
David: Never been seen before. If 40 was the peak, and here I was as a young whipper-snapper looking at $12 a barrel. But I was curious. How does an asset that is traded for decades do something new, do something that it’s never done before? And I proved myself to be a man of little faith. How right he was, how right he was. I was in an office that was more fascinated with Sun Microsystems. Could care less about oil. Oil was a dead asset. Oil was something that you could take for granted. Information was the new oil. And so Sun Microsystems, that was where you went. Never before seen market caps. PalmPilot, the devices that were pioneering the handheld computer. WorldCom owning the entire world. 90%, 95% of the world’s fiber optic cables, the backbone of the internet, the pipes of the .com era, that’s where attention was. Nobody cared about oil.
Outside of tech you had Enron, one of the top positions held by Wall Street firms and its clients. And I’ll tell you, Kevin, of those four names, two disappeared, two were embroiled in scandal. Sun was worth over 200 billion at its peak, and it sold to Oracle almost a decade after its initial decline for less than $6 billion. A peak to trough loss of 97%. And it was one of the darlings. You look at today’s landscape, Nvidia could very well be this generation’s Sun Microsystems. Investors don’t have the imagination for downside. All they see is blue sky. Investors are lining up and gladly paying for 115 years worth of earnings. In the case of Sun Microsystems, no amount of patience helped. The extinction event came before the investor payday.
Kevin: You brought up PalmPilot being one of those. And I remember the hope because you’ve talked before how a company may have the idea of the future, but they may not be the company of the future. I had a client back in the late ’90s. He did real well with PalmPilot. In fact, he had over a million dollars invested in PalmPilot, and we did the triangle and talked about possibly taking a third of that and getting that into gold while he continued to speculate on the PalmPilot.
David: I know the story only too well.
Kevin: Oh. And Dave, he ended up starting with 30,000. He said, “Well, I’m going to start with a tenth of what you’re recommending, Kevin. I’ll start out with 30,000 in gold.” And he continued to put money into PalmPilot. I remember the call when he called back. He never invested more than the 30,000 in gold. He called me back and he said, “Kevin, Palm’s way down.”” He says, I’ve lost an awful lot of money. I know I need to leverage this and invest.” And I said, “Well, how much do you have to do that with?” And he said, “Well, I’ve just got the 30,000 in gold. Could I sell that back and put that into PalmPilot?” And I said, “Mark, don’t do that. Don’t do that. Just keep that just in case—”
David: The burnt bandaged finger went wobbling back to the flame.
Kevin: Oh my. So I hear what you’re saying.
David: Well, who caress about natural gas under three bucks? Who cares about silver under 25? Who cares about gold finishing a 12-year consolidation and beginning to break out? Disbelief is the common outlook. And I go back to those Morgan Stanley brokers that I worked with. What they heard sounded just flat crazy. You’ve got this guy who maybe he should have stayed a first chair violinist. Crazy noise from the chart-wielding violinist/oil bull. So here we are, the gold and silver bull. Here we are, selective aficionados of hard assets, tangible, real things. Maybe it’s crazy sounding, maybe it’s actually symphonic. Does the commodity bull deserve a padded cell today? Is it crazy or is it first chair stuff?
I think the gold chart, I think the 12 years of consolidation, I think the teacup and handle breakout, it implies significantly higher prices. It sounds crazy to consider gold at two to three times its current price because we’ve never seen it before. But that’s what happens. It’s crazy to consider silver at eight times its current price, but that’s what happens. It’s crazy to think about the companies that do a good job digging in the dirt. And by the way, they are few and far between. It’s crazy to think that they could trade at 10 to 12 times current values, but that’s what happens.
Kevin: This is why we have to redefine our imagination and actually go back and say, “Okay, you can’t really see the future without seeing the past.” We’ve talked before about future memories. That’s really how our mind works, is we take memories of the past and we build toward the future. And you have, over the last year, maybe a little longer than that, you’ve been saying that a breakout above 2,070 is really very important for this to establish a new floor. And I remember Sunday night, about 4:00 this last Sunday, I just looked at the gold market and it was up $60. It was in the 2,130s. 2,140s I think is what it got up to. And then I told my wife, “Well, it’s up $60 right now but you can bet it’ll be down by the time we open tomorrow morning on the Monday morning open.” But what are your thoughts right now? Because we’re flirting with the numbers that you’ve been talking about for a while.
David: Weekend trading, Sundays and holidays, this is the place where you see crazy volatility. We’re right on the line prior to this move. We’ve been marching higher and been getting there slowly. And then we’ve got a spurt of energy, which speaks to me of significant derivative plays and futures market transactions. It’s the leveraged speculator who comes in late. And we’ve seen evidence of that in the COTs. Actually, for me, what is, as a contrarian, somewhat discouraging is the quantities of speculators and hedge funds positioning in the futures markets. And to see the kind of volatility we’ve had in the last few days, it speaks of the short-term comers and goers, not the long-term investors.
Kevin: And when you mentioned COT, that’s the Commitment of Traders. You might explain that to the listener who’s maybe not familiar.
David: Yeah, the Commitment of Traders reports just measure who is buying futures contracts. Is it the commercials who are hedging future production? Is it speculators? Is it longer-term holders like institutions, family offices, insurance companies? There’s a variety of players. And when you see a lot of activity amongst the speculators, the short-term momentum traders, your trend needs to take a break. So we’ve said that, for over a year, this break over 2,070, essentially 2,100, redefines the trading range for the next decade. We are flirting with those numbers now.
And again, over the past four weeks, GLD has finally seen its first inflow of Western money in a while. That’s 23 tons. Nothing to sneeze at, but paltry compared to the cumulative liquidations over the last three years of 420 tons. So again, I look at the COT reports and I think, “Ah, we could have a little downside in metals here.” It’s become a crowded trade amongst the leveraged speculative community. And to see it move lower, not a problem. The fact that we’re toying with this 2,070, 2,100 number, the fact that we’ve got Western investors just beginning to consider what are the implications of an unhinged Federal Reserve, three years of unrelenting sales, 420 tons dumped from GLD and an appetite just now returning. The floor set in the East. That floor has moved up. The floor two years ago was 1,600. It’s migrated higher this year into the 1,800s. The ceiling over the next few months will be broken. We traded above 2,100 for the first time ever on Sunday night and then lower again. Thinly traded markets make for high drama. Nothing new here.
Kevin: This is a smaller element, but we’re coming into the season for gold, are we not? The next couple of months, usually, year by year, are pretty good for gold.
David: It’s not bad. It’s not bad. December to February captures the Indian love trade and the baton being passed off to the Chinese and the Chinese New Year. You move from one culturally inclined buyer market to another. So any weakness we see in price will actually be very intriguing because the weakness in price right here, right now will draw in more Indian and Chinese buyers. What you see is weakness in price experienced with trepidation by investors in the West. “What does this mean? Is it going lower? I should get out now.” Opportunism in the East, that’s the difference in perspectives, perhaps a little weakness in spot price. And guess what we have right now? At the same time with a little weakness in price, you’ve got the RMB rallying. You’ve got the Chinese currency rallying. Does that provoke Chinese buying as we head into the Chinese New Year? Oh, I think so.
Kevin: You’ve been bringing up the difference between West and East, but there is an ideological difference. The type of people, honestly, Dave, that I like working with are the ones that understand what it is. It’s wealth preservation. But so often someone will hear, let’s say I’m at church or at the store, they’ll say, “Well, what do you do?” “Well, I work in the area of precious metals.” And they’ll be like, “Am I going to make any money on my gold? Am I going to make any money on my silver? Is it going up or down?” There’s a different ideology. They don’t understand the wealth preservation aspect unless it’s explained to them. And sometimes even after being explained, that type of investor really is not the long-term gold buyer.
David: Kevin, John Templeton was asked about great wealth creation, and it was not in speculative ventures. It was in earned income, living beneath your means, and saving a healthy percentage of what you bring home. His recommendation was that you save 50%, 51% exactly, of your income. That may sound extreme, but this is it. Gold is money. Gold is a means of preserving the purchasing power of your savings.
I guess what I’m saying is that wealth creation is a matter of discipline. Disciplines of the mind, disciplines of the spirit, work disciplines, work ethic. Wealth preservation, that’s a different question altogether. And that is where I think the difference in orientation, East versus West, so much of that orientation, different understandings of what gold is. If you see gold as an enduring form of wealth that can be acquired at a discount, there’s room for enthusiasm when there’s weakness in price.
And I can’t tell you the number of Western investors that do not operate on that view, which I think is the healthy view. Gold as enduring wealth. Instead, what is it to them? It’s a bauble. It’s a trade. They care about the next 10 cents lower or higher on the silver price, $25 lower or higher on the gold price. And there’s disappointment and there’s regret and there’s remorse. These are the first expressions when things don’t go exactly the way they want them.
Without a view of markets, without a view of global events from a historical perspective, daily volatility is confusing. It’s disorienting. With a view of our place in a time and event sequence, and a perspective on the frailties of mass confidence—mass confidence in things like fiscal policy, monetary policy, the central bank community—with an eye on the devolving global order, with a change in amount of faith that is placed in institutions, I think you begin to see there’s a very different role that gold plays, and a different need for preservation of capital. A bet on gold has nothing to do with price, nothing to do with chart points, nothing to do with capital gains or losses. If I could borrow from Gerald Loeb’s classic 1935 title, it probably has more to do with the battle for investment survival.
Kevin: You bring up, Dave, all these various aspects of demand, Eastern demand and why, but when we’re looking at a market, you and I both know that supply is an important part of the whole price equation. There was something that just shocked me. I should have known this, but I really didn’t. You all over at McAlvany Wealth Management look closer at the mining community, but during the McAlvany Wealth Management meeting it was pointed out that, as far as supply goes, in the 1990s exploration found over 180 one million ounce or greater fines for gold.
Then, in the decade of the 2000s it had dropped to 120, but that’s still a lot, over a million ounces of gold or greater, 120 finds. Then, from the 2010s, in the 2010s, it dropped all the way down to just 40. What was shocking, Dave, was that even though exploration budgets have been rising, from 2019 to present they haven’t found any. Zero.
David: I think that’s the key point. It’s that exploration budgets have more than doubled in recent years. Since 2016, we’ve gone from $3 billion a year in cumulative exploration budgets amongst your gold miners to over $7 billion annually, and they are not finding the ounces. Over the last three years, not a single discovery over one million ounces in the face of a doubled exploration budget, but the demand side for gold is where we’ve spent most of our time today.
Underappreciated—at least to the uninitiated in a market like this—is the supply side in elasticity. You need to be able to find the gold, and even when you find the gold, from the time you discover it to the time that it’s permitted and in production you’re typically looking at seven to nine years. We are not putting anything into the pipeline. You can’t keep up with demand, and the only adjustment in terms of a market dynamic is the price, which tends to adjust dramatically.
There’s product, but not in the form that most investors can access. If you’re talking about looking at the market today, an investor who wants to take delivery of ounces, and you say to yourself, “I want to buy 1,000 rounds of silver. I want to buy 16, 17, 20, 50 ounces of gold,” what you’re going to find is that over the next year or two your one-ounce product disappears. Your 10-ounce product disappears. The stuff that is easy for the man in the street to buy, it’s all gone. It’s all gone.
We will not run out. We will not run out of kilo gold bars or 400-ounce gold bars, but I mean think about that. Not everybody is lining up to pay $68,000 a bar. Not everybody can pay $840,000 for a 400-ounce gold bar unless, and here’s the carve out, unless you’re using a program like our Vaulted program where you can buy out of a kilo bar, buy out of a 1,000 ounce silver bar in any dollar quantity that you want. You’re getting the benefit of the economy of scale in those larger bars, and we are not going to run out of those bars, not anytime soon.
You’ll find that smaller product becomes simply unavailable except at huge premiums. We saw this last year at this time. An American Silver Eagle in the open market, our cost over 70% higher than just its silver value. That is ridiculous and guess what? It was also unsustainable. It went away only months later. Why? It’s because the US Mint came back into production with 2023 ounces. These supply constraints make for crazy trading within the small product market, and if you’re going to be coming into the market, figure out what your strategy is.
This is what we saw in 2008 and 2009: huge premiums on small products. That inspired our solution. That inspired the evolution in the gold markets. We designed the Vaulted program. Now, with silver also a part of the program, advantages are even greater. Buying a portion of a 1,000 ounce bar at 1,000 ounce bar prices, we have zero competition. Price it per ounce. I don’t believe there’s a single outlet for silver that can match our bars at HSBC.
Kevin: It’s so nice to be able to just pick up my phone and say, “I’ve got about 5,000 more in the bank than I want,” and just move it right over into Vaulted. It’s like buying gold on my phone. Now that doesn’t nullify— You’re talking about how thin the markets are on actual physical product that can be traded on the street. The investor that works with us typically will have a pretty good portion of what they own in small tradable product that they have in hand, and then the gold you buy on your phone, portions of bars. That is a really convenient way to exit the dollar and the banking system.
David: I’ll give you an example. I got an email text from the Vaulted crew today, this morning, because it’s just in the first week of December, and from payroll there is a deduction. I do this as a part of our Vault plan every payroll and it automatically buys a certain dollar amount of gold, a certain dollar amount of silver. I love it. It’s automatic. It’s a savings plan. I am deliberate and calculated like the ant moving one rock at a time. I’m going to do that from every payroll from now until kingdom come.
That’s just a reality. Now that’s not the gold that I want to have in-house because there is other product that I do want to own. Supply is not an issue today. To your point, supply is not an issue today. If you want to take delivery of a British sovereign, you can. If you want to take delivery of a one-ounce Silver Eagle, Gold Eagle, you can do that. It’s only when the Western, it’s only when the American investor flips the switch and decides to take an interest in gold, which they still have yet to do, it’s then that you discover how thin, how limited the availability is except in programs like Vaulted.
The global financial crisis supply bottlenecks shocked me and they scared me. To be in business and not be able to transact business scared me. There were months where the price was soaring and we as a company faced an unanticipated risk: no sales, nothing available, allocations per day per client so miniscule as to offend. I said to myself, “Never again, never again.”
Vaulted is an innovation to empower savings under any circumstance, and here we are looking at these bizarre circumstances that frankly most investors have yet to appreciate. We’ve got a US fiscal debacle, which is, to refer to, to borrow from Stanley Druckenmiller, like a 200-foot tsunami 10 miles out. We are ignoring it at our peril. We’re pretending like NVIDIA is the only way to invest, like Apple is the solution to every problem, like Microsoft. This is really, really amazing to me. It’s going to boil down to mass psychology, mass psychosis. What an amazing time to be alive.
Kevin: Dave, I may be a very simple person, but when I listen to you talk and when I look at what’s going on around, just give me my gold. Give me my gold. Even if it’s at $2,100, give me my gold. I want to have gold right now. I want to be out of the system, and I’m just not in a speculative mood.
David: Again, I could go back to the lack of imagination. It is inconceivable to most people that gold can trade from $2,000 to $4,000 to $6,000 to $10,000. It is inconceivable. It does not capture the imagination that silver can trade from $25 to $50 to $100 to $200 an ounce and yet these are the trading dynamics we’ve seen with oil. These are the trading dynamics we’ve seen with natural gas. These are the trading dynamics that we’ve seen with copper.
When you imagine price moves, always bear in mind the importance of supply side inelasticity. If that doesn’t make sense, just think about it. You cannot snap your fingers and go get an extra million ounces, an extra five million ounces, an extra 10 million ounces. That’s not the way the world works. That’s not the way the markets are structured. And we’ve been at this place where apathy and complacency with the gold market in the West is on display.
In the East, every opportunity to buy cheap has been taken advantage of year after year after year, and if you give them a chance to do it again today, they’ll do it again today. Where are we? Where are we? Fat, dumb, and lazy. Ignoring the obvious: the elephant—the elephants, not one, the crowd of elephants in the room: overvaluation in the stock market, unsustainability in the debt markets, a rollover of massive quantities of debt at higher and higher numbers. You think $1 trillion in interest is tough? Try $1.5 trillion.
It’s coming to a theater near you. The rest of the world sees these fundamental issues. This gets very interesting from this point forward. The supply dynamics are there. The demand dynamics are there. The technical setup is there. The Western buyer exhausting the upside of Apple and NVIDIA and Microsoft, it’s there. Can you imagine those same Western buyers flipping from NVIDIA and Microsoft to kilo bars and Krugerrands? Not today. Not today. But it’s coming. It’s coming very soon.
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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, M-C-A-L-V-A-N-Y.com, and you can give us a call at (800) 525-9556.
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.
