EPISODES / WEEKLY COMMENTARY

Gold Rises, Dollar Rises, What That Means

EPISODES / WEEKLY COMMENTARY
Weekly Commentary • Apr 03 2024
Gold Rises, Dollar Rises, What That Means
David McAlvany Posted on April 3, 2024
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  • Three Iranian Generals Dead In Damascus Airstrike
  • 75% Of Financial Advisors Have Less Than 1% Exposure To Gold
  • Gold Is Hitting Highs Without The Western Investor

“I’m a little less impressed about the strength of the US economy today. The Treasury department, the Federal Reserve, for the best intentions I’m sure, are goosing this economy. Massive government deficits at times of prosperity, a Fed promising to cut rates even as asset prices are melting up, looser policy. The rest of the world, especially our allies and adversaries, look at us, and maybe they’re impressed by GDP growth, maybe they’re impressed by the stock market, but I wouldn’t say they’re overly impressed by the US economic engine. The engine seems like it’s being stimulated even at a time of full employment.” –Fed Governor Kevin Warsh, as quoted by David McAlvany

Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick along with David McAlvany.

David, as always, we come into this recording after having a company meeting, and of course Morgan talks, and you’ve got various people from the company who speak, but George today spoke up. He’s been in the metals industry for 47 years. He said, “Guys, I just want to tell you I’ve looked back at the last 19,000-plus days, and I’ve tried to figure out what day is the best day to buy gold,” and he said, “Every one of them. Every one of them.” He made that comment because we’ve got so many people right now calling and saying, “Hey, gold’s at all-time highs. Do you think we ought to sell?”

David: Well, following up on last week’s comments, gold is at or near all-time highs in a dozen currencies, and it’s only the Western investor who, on this move, has been left out. The move from 2000 to 2250, we’ve seen people exiting the markets, and particularly as we got up to 2,100. What we’re edging closer to is a disorderly trading in a variety of key global currencies, and that is reflective of root rot within those economies. When you artificially stimulate growth, you can compromise the integrity of the system and you can jeopardize future growth. It’s a little like soil exhaustion. You can, for a time, increase your agricultural yields, but that can also be a precursor to dead soil and a radical decrease in production.

If you look at currency markets, they are edgier by the day, and you can look at each one of the countries in question. China certainly comes to mind. If not for over $3 trillion in currency reserves and an active defense of the Chinese currency, it would already have capitulated. They’ve gone from 4 trillion in reserves to 3.2 trillion today. That goes back to 2014 when it was 4 trillion. The question in China is: what cost—at what price for stability?

Kevin: Right. They’re depleting their assets to try to save their currency. The Japanese have been doing it for so long they’re running out of steam.

David: Yeah, and it’s a confidence game. It’s a confidence game. As long as you can maintain normalcy, then you’re fine and life goes on. The Japanese don’t have near the monetary firepower. Last week, the currency touched 34-year lows, the yen to dollar exchange rate, 151.97. Disorderly trading in yen could very well serve as a catalyst for an unwind of huge leveraged bets throughout the financial markets. I’m not just talking about in Japan, but globally. The music stops, and the leveraged speculator starts scrambling for a chair. And we’re close.

Kevin: Yeah, it’s disorderly, but do you have the ever-present question of when?

David: Well, it can be disorderly. It’s not disorderly yet. No one knows when these scenarios turn disorderly, but the backdrop is set. You’ve got nominal GDP to nominal public debt, which is clearly the ugliest in Japan. But in Spain, in the UK, and in the US, all of those countries exceed 300 to 350%. Again, this is nominal GDP to nominal public debt. Canada is just below that level, with Italy and France and Germany. By comparison, they look like the unleveraged fiscal conservatives in the group, and they’re between 150 to 225%.

Doug was commenting in the Credit Bubble Bulletin over the weekend, Japan’s delusional officials will be tested. What he’s talking about is, we’re now to that critical level, 152. We trade to 152, and you’ve got a whole set of options which move the other direction and create instant volatility. He goes on to say, “The world has changed. It’s now an elevated inflation, policy rates, and market yields environment. Accordingly, it’s the Japanese policy rates that is today out of line with fundamentals. It’s not yen weakness.” I think, Kevin, the bottom line is that regardless of your geography, whether it’s across the pond or here in the United States, you cannot escape the credit cycle.

Kevin: You can’t escape the credit cycle, but you can make people think so for a little while if you have reserves. I mean, what are we doing? We’re in a loose policy environment right now with high inflation.

David: Well, right. And global government debt has swelled to $82 trillion. It’s up $50 trillion. This is just government debt. This is just government debt since the global financial crisis. With sticky inflation and a higher-for-longer interest rate reality beginning to permeate the landscape, it ends up being very consequential. Financial conditions remain ultra loose. What do we see in the marketplace today as a result of those financial conditions remaining ultra loose? Fear is absent from the marketplace.

Kevin: Rampant speculation.

David: For now. For now. Volcker said in 2018, “The real danger comes from encouraging or inadvertently tolerating inflation and its close cousin of extreme speculation and risk taking, in effect standing by while bubbles and excesses threaten financial markets.” Kevin, to be honest, no one sees a bubble as a threat to the financial markets. They just love it as a boom time. But Volcker says, “Ironically, the easy money striving for a little inflation as a means of forestalling deflation could, in the end, be what brings it about.” That is the basic lesson for monetary policy. It demands emphasis on price stability and prudent oversight of the financial system. Both of those requirements inexorably lead to responsibilities of a central bank.

Kevin: Do you think so? Okay. So Paul was right on the close cousin, extreme speculation being softness on inflation, but what Paul actually did back in the 1980s was raise rates dramatically. How would you think he would measure inflation today? They’ve changed that number several times. What would Paul say?

David: Yeah, if we could talk to him. Unfortunately, he’s passed. We’d have to say— Sorry, Paul. The basic lesson of monetary policy that’s been set aside, and it’s been set aside for short-term gains. We have long-term pain, which will follow this imprudent management of price stability and of the financial system.

Kevin: But what is inflation? I mean, inflation back in 1980 was measured one way. Inflation now is measured completely different.

David: Yeah, it’s no big thing. It’s no big thing. In fact, it’s been falling off of the peak levels, and we heard from the Fed in recent weeks that, actually, they feel like it’s going back to its 2% target. But inflation measured by Larry Summers— And this is economics professor at Harvard, was president of Harvard for a number of years. He’s measuring it presently around 8%. Now, if you use the same measurement tools that Paul Volcker used in the 1980s, we’re closer to 11%.

Kevin: That would be more like what my wife would say inflation is when she comes home from the grocery store.

David: That’s the consumer’s experience, and that’s the difference, the divide between the man in the street and the PhDs who are running the system. I mentioned negative rates in the last week’s program. We are still deeply negative. If you look at where we’re at with the Federal Reserve target rate versus even Larry Summers’ number of 8%, we are deeply negative. Totally different measure, but if you look at where the policy rate should be, the Taylor rule, which does follow the classic CPI model— As faulty as that may be, the Taylor rule implies the neutral rate should be over 6.25%. 6.37% is what it should be today. Neutral implies that it’s neither stimulative nor restrictive. The Fed on the one hand is saying we have incredibly restrictive monetary policy. The markets are behaving as if monetary policy hasn’t been and couldn’t be looser, and the Taylor rule would imply that they are still behind the curve.

Kevin: Yeah. But what if they raised rates right now, Dave?

David: Yeah. Obviously, they’re talking about lowering them, but if they raised them, it would tank the asset market—and they know that. They know that. Thus, you have the need for Powell’s pivot language going back to December. Of course, what, from then till now, even prior to then, the continuing ultra-loose financial conditions.

Kevin: We’ve been watching and listening to reports of the rest of the world, especially Russia and North Korea, China. Actually the BRIC countries wanting to move away from the dollar, sort of dethrone the dollar as the world’s reserve currency. Are we doing it to ourselves?

David: Well, to some degree we are. There’s no surprise that Iran, China, Russia, North Korea, they share an affinity for each other and they coalesce around that idea of dethroning the dollar, replacing the US as the global hegemon of sorts. There’s an objective case to be made for the US dollar falling off the throne. No outside help, just dying via fiscal suicide. Call it cirrhosis of the fiscal liver. But resilience in a world of currency prices—when you compare one relative to the other, is the dollar going to be strong or weak? It’s defined not by your strength, but really by relative weakness or relative strength to other currencies.

Despite our destabilizing debt levels, with interest costs now expected to exceed a trillion and a half this year. We’re up from a trillion last year, highest estimates are 1.6. 1.5 may end up being conservative.

Kevin: Just taking tax revenues into account, how much does that make up of our tax revenue?

David: Over 25%.

Kevin: Wow.

David: Actually, 27% if you’re generous.

Kevin: Wow.

David: If you’re generous on the tax revenue side— Last year, we saw a decline from 5 trillion to 4.6 in tax revenue. Bump that up to 5.5 trillion. Basic math, divide 1.5 by 5.5, 27%. The dollar’s value is shockingly on the rise, but again it’s on the basis of relative strength.

Kevin: Well, see, I think about that because you said cirrhosis of the fiscal liver. But when the world is in chaos and you have a lot weaker things going on worldwide, like in currencies, cirrhosis takes a while to kill a man.

David: Oh, that’s right. But, I mean, still the consequence of too much liquidity is ultimately felt. The importance of the dollar—and its preeminent role seems to become more obvious the more chaos or disorder there is in the world. That chaos can be financial, that chaos can be geopolitical, occasionally it’s both.

Kevin: The dollar, though, has been the go-to currency when you have geopolitical chaos. We named Russia, we named China, we named North Korea, may as well name Iran.

David: As you see dysfunction in the Middle East and in Russia, that proliferates. As the Chinese come closer to conflict with both the Philippines and Taiwan, the dollar sails through the fog like a giant carrier fleet. It appears more important in the context of conflict. It is this financial go-to. When there is chaos, when there’s uncertainty, the dollar gets a bid. When there is geopolitical concern or chaos, the dollar gets a bid. Again, it appears more important. It appears stronger in the context of conflict than it would under normal circumstances.

Geopolitics has its revenge eventually within the spheres of domestic policy and currency stability. At present, there are multiple theaters of interest, multiple theaters of strain in terms of geopolitics. So long as there are conflicts brewing, dollar strength is this fascinating reality to behold. It’s not justified by our levels of public debt, it’s not justified by our trade deficits, yet, like a military presence, it’s deemed more important in the context of those four autocratic expressions, four direct threats to global stability. By the way, gold strength in the face of dollar strength, gold strength in the face of elevated rates is an even more fascinating reality.

Kevin: Let’s talk about that fascinating reality, because Morgan, when he was talking today about why gold normally would’ve been thought to go down during this period of time— I mean, the dollar has strengthened from a 100 to, what, 104. Interest rates have been rising over this last year. Gold’s hitting all time highs. When you say gold rising in this period of elevated rate is fascinating, well, why is it fascinating? What’s going on? Is it geopolitical conflict that the world right now is buying gold for, or is it inflation?

David: Well, I do think it’s more geopolitical conflict, and inflation is something that drives us crazy. But gold, if you look at its long history— I often talk about Roy Jastram’s book The Golden Constant. It’s a reminder that gold as an inflation hedge has a spotty record. It will, in fits and starts, ultimately catch up to the ravages of inflation, but it does not keep track in real time. It’s a better hedge in the context of deflation, preserving your purchasing power, and that’s— Again, if you want to read a book, that is a fascinating look and it’s actually quite the opposite of what the textbooks say. But proven in math, that’s what you have.

If we look at the world as a whole, if we look at the geopolitical conflicts that we have, the US and the organizations that we fund, they’re really the only thing standing between the wider world and a vision of despotism practiced and refined and tragically kept alive by those four states I mentioned earlier. Each of them has its own version of extremism. You’ve got religious extremism in Iran, you’ve got the cults of personality in the cases of Xi Jinping, Vladimir Putin, Kim Jong Un. What you see in each of these places is, freedom has died. It’s died in their geographies. The re-education and the enforcement of a public that must love, must adore, or at least fear their abusive leaders, that’s a fascinating, fascinating evolution.

Kevin: Well, and you see these bumper stickers that say coexist. There are some things that refuse to coexist with the other things on that bumper sticker.

David: Well, to put it bluntly, their world of intolerance and control, it cannot exist with ours. Conflict is inevitable either in the economic sphere or the military spheres, because dialogue, it assumes shared reference points. Dialogue assumes touchstones of reality and language which we can agree to, and those don’t exist.

My favorite quote of the week, it comes from Fyodor Dostoevsky. My son’s reading The Brothers K[aramasov] and hating it right now. He prefers Crime and Punishment. I have to agree, I like Crime and Punishment more. But Dostoevsky says, “A man who lies to himself and believes his own lies becomes unable to recognize the truth either in himself or anyone else.” Remember Chesterton? He opens his book What’s Wrong with the World with a wise assessment. Chesterton, I think, was very wise to assess the problems in the world beginning with something very simple, a good look in the mirror.

Kevin: You think about that, too. You cannot judge these leaders by sincerity because they really do believe their misrepresentation of the truth. I mean, they really truly do because they don’t see themselves.

David: Well, this would be a great place to start, but I think it’s unreasonable to expect Putin, Xi, Un, Khomeini. They could start there, an honest look in the mirror. But because the truth is less important to them than power, and lies are highly effective tools in propagandizing the globe, these are men who have grown incapable of seeing themselves and incapable of seeing others as they are. That makes for a world of conflict, not a world where dialogue or diplomacy is a possibility.

Kevin: You’ve spent some time in Israel. I got a chance to go back in 2017. And, of course, on the east you have the Jordan River, and then of course the Mediterranean Sea on the west. A lot of people here who haven’t been to Israel or really looked at the situation, they’ll say, “Well, why can’t there just be a two-state solution? Why can’t they just all get along?” But the saying with Iran and Hezbollah and Hamas is from the river to the sea. It’s the complete annihilation of Israel from the river to the sea. What we’re seeing right now is we’re seeing Netanyahu fighting back hard. It doesn’t seem like he really cares what the United States or the Biden administration is saying.

David: Israel in recent days has struck the Iranian embassy in Damascus. What listeners might not appreciate is Damascus, Syria is where Hezbollah has been orchestrating a lot of its strategy into Israel and with the conflict with Israel. Israel strikes the Iranian embassy in Damascus. The Hezbollah’s strategy has been orchestrated there, and in recent days you’ve got at least three brigadier generals from Iran and a number of other important attachés attached to them. They’re dead. They’re dead.

Over the weekend, we had Israeli protests, and they’re thought to be orchestrated by the US CIA. We’re exerting our pressure, trying to move the needle popularly such that there is a change in leadership in Israel, a change in policy as it relates to Gaza and incursion into Rafah.

Kevin: Like our friend Bill King would say, “How’s that working out for you?”

David: Right. Israel responds with crystal clear clarity, F-35s and six missiles dispensed into the diplomatic sector in Damascus. That is the command and control center for Iranian operations in Southern Syria and Southern Lebanon. Netanyahu was, in essence, establishing his boundaries and doing that quite well. He would say, “Okay, so the ceasefire and the UN proposal, the UN demand, there’s no release of hostages as a prerequisite, so we’re going to stop and assume the best of our enemies? Not on your life.” You’ve got US political pressure that is not a primary consideration in Israel’s contest for survival.

Kevin: So there’s a lot of pressure on the Biden administration right now. You’ve brought up in the past that this is creating quite a conflict because that splits the Democratic Party.

David: It does. The Democratic Party is deeply divided over the Hamas-Israeli conflict. As we edge closer to November, Biden has to play politics. But interestingly, Bibi doesn’t play for the same thing. He’s not playing for who wins in November. He cares about a fundamental question of existence in a hostile world, surrounded by countries that maintain this prophetic vision of Israel’s annihilation.

Khomeini is a Twelver. The vision of Israel being wiped off the map is crystal clear to the Shia, it’s crystal clear to radical Sunnis alike, and that’s what you see in this coalescing between Iran and Hezbollah. Hezbollah has long been funded by Iran, but a concentration of Iranian leadership across the northern border in some sense is irreplaceable leadership. That was a hard hit this week.

What you have is this powerful intelligence apparatus in Israel, obviously dealing with the discrediting events, regaining their reputation after October 7th, which they missed completely. They’ve struck a significant blow to Hezbollah, and they’ve struck a significant blow to Iran. Of course, their trade-offs clearly will be blowback.

Kevin: I remember when we were at the Israeli-Syrian border. Looking to the north about 25 miles was Damascus. Damascus is a headquarters for the offensive against Israel from the north, and I remember the mountain behind us, which is Mount Hermon, one of the many peaks of Mount Hermon, there were a few antennas. Very few, but we were told that there was a complete complex underneath that mountain that was monitoring, continually, Damascus. It was monitoring northward. When you talk about that intelligence co-op that Israel has and the insight that they have, they understand where the enemy is located. But now it’s not Syria that we’re talking about, it’s not Damascus we’re talking about. This was an attack on the higher-ups in Iran. Where does this go from here?

David: Iran has never fought with their gloves on, in the first place, but no doubt in my mind, direct missile strikes from Iran affirming this is a massive regional escalation. When you look at geopolitical escalation, de-escalation, this certainly brings things to a head.

Kevin: So you think there might be actually direct attacks from Iran?

David: I think so. Israel’s body blow will be countered with powerful, if not shockingly brutal, countermeasures. This move undoubtedly gets in the heads of Hamas and Hezbollah. From that standpoint, think of all that they had to do to move really important people around within Syria and within Damascus. All of a sudden, their covert ops are not covert with Israel watching, listening, and making this surgical strike. Iranian leadership has to second-guess their every move in a world where Israel can pinpoint their most effective military leaders.

Kevin: This goes back to the dollar and gold both being strong at the same time.

David: Well, in a world of less stability, the dollar can be strong in spite of the case that you can make against the dollar, in spite of, as we described it earlier, falling off the throne, cirrhosis of the fiscal liver. But again, the dollar can be strong relative to other currencies and, as we’re witnessing, so too can gold.

Kevin: But the Western investor, okay, the average guy on the street’s like, “Hey, gold’s hitting an all-time high. I think I’m going to finally take my profits.”

David: Well, that’s right. It’s fascinating to see. We closed the week, we closed the month, we closed the quarter at an all-time high, having traded above 2250. Shockingly, there’s still apathy amongst investors on the topic of gold. In my mind, this is an ideal setup. This is actually quite encouraging. Ordinarily, a breakout of this magnitude would run out of energy pretty quick because essentially any market runs out of steam when you run out of new buyers. There is a vast quantity of Western investors that have missed this one entirely. In fact, they were busy selling just below 2,100.

Anecdotally, we’ve seen far more liquidation trades than purchases over the last 30 to 60 days. As the price reached 2,100, the ratio has stayed pretty well constant around three liquidations for every one purchase. I was looking at Jim Bianco’s comments, and he points out that the recent peak in ETF purchases—that’s GLD, IAU, things like that—was back in 2020. The total ounces in those products, 111 million ounces. We have left the old highs behind. We’re now at 2250. This is 2024, a new timeframe. ETF holdings, according to Jim, are sitting around 82 million ounces, well below what they were a few years ago.

In fact, if you look at January and February from the World Gold Council, they report—and we’ll have March numbers soon enough—but January and February both had large ETF outflows. We’re getting to all-time highs, but this is not a market that, in that sense, is overbought. Technically, you can make the case that it’s overbought. If you’re looking at the futures markets or the COT reports, certainly you can make the case that it’s overbought. But in terms of open interest, in terms of the quantity of retail buyers in the space, no, it’s not overcrowded. It’s not overcrowded at all. We’ll see if March had a reversal of that trend, but open interest is not at records. Again, we’re looking at the futures markets. Yes, it’s overheating, but certainly, for us, that provides a little bit of caution, but we’re not at record levels.

Kevin: But there’s an amazing amount of complacency in this market. The talk right now is war with possibly Iran, possibly China, maybe over in Europe with the Ukrainian situation. We’re going into spring, and that’s when usually the Russians will continue to try to expand their footprint, yet you’ve got complacency here, Dave. I mean, gold’s hitting all-time highs. The dollar is actually rising based on geopolitical pressures, and you talk to the average guy and he’s wanting to know whether you own something over on the AI space.

David: Well, that’s right. I think you can look at it from two vantage points. There’s some headline fatigue where people just don’t care about what’s happening in Russia and Ukraine anymore. People would like to move on from the Gaza-Israeli conflict. And yes, there is the AI craze and anything attached to AI. Bank of America surveyed advisors, professional Wall Street advisors, and the survey on the topic specifically on gold showed surprising complacency in terms of these Wall Street advisors. So far this year, 90% of financial institutions are neither increasing nor decreasing in gold exposure. Only around 5% are increasing. If you look at the measure of all advisors, 75% of advisors have less than 1% exposure, all the way down to zero in terms of gold.

Kevin: I’ve experienced that. You do, too, all day long. When I talk to people and they say, “Well, my financial advisor, he doesn’t really recommend gold,” and it’s like, “Wow, how many crashes have we been through when the financial advisors didn’t really recommend gold, and all of a sudden, in two or three days, people have lost a third of their stock portfolio, and they had no hedge underneath it?” And the financial advisor’s like, “Yeah, but I still don’t really advise gold.”

David: I was reading a quote from a gentleman who lived between 1485 and 1560. He was writing about market complacency. It was a fascinating look because you could have been—

Kevin: Really? Back from the 1400s?

David: Exactly. It could have applied today, and in essence was saying, “no one anticipates a decline because you don’t have bad markets in a decline. You have good markets which precede a decline.” Everyone’s attitude, everyone’s disposition— This is before the age of economists and professional market watchers, but it was as true then as it is today that people don’t anticipate as long as they’re fixated on what is working.

We started our discussion, global leadership issues, and geopolitical pressures, and those being created or exacerbated by at least four different state agendas, countries that want to see a different structure in the global arena. But you’ve got oil and you’ve got gold that are moving for other reasons. Yes, this week we see oil pop in concert with the airstrike in Damascus, but one day’s volatility and upside gain, that’s taking place in a much larger context. What is the context? I think Bill Dudley—he was quoted by Bloomberg here recently, saying, “Maybe monetary policy isn’t all that tight.”

Kevin: You think?

David: Yeah, that’s right.

Kevin: You know what it reminds me of? Okay, in The Grinch, the movie, he says, “Maybe Christmas doesn’t come from a store. Maybe Christmas is a little bit more.” He gets this realization that maybe there’s something he missed. Bill Dudley is basically saying maybe monetary policy isn’t all that tight.

David: Well, that’s right. It’s fascinating to see the Treasury chiefs and the Fed chiefs who have moved on, who finally have a moment of reflection, maybe even a moment of honesty, maybe a moment of looking in the mirror and seeing who they are, what they’ve actually done. A moment of truth. Bill Dudley’s right. Not tight at all.

The Goldman Sachs Financial Conditions Index reached its all-time loosest in November of last year, just prior to Jerome Powell’s dovish pivot. Just let that sink in. The Goldman Sachs Financial Conditions Index reaches its all-time low. Again, just a measure of conditions, this is as loose as it’s ever been, and this is just before Powell’s dovish pivot. Shockingly stupid on Powell’s part to suggest rate cuts in a loose environment.

We sit back from November, December to the present and all through the first quarter. Is there any surprise that we get a melt-up in prices in Q1? The reality is, from this point forward, history will be less than kind to Powell’s priority of asset inflation over the price stability mandate tied to our currency.

Kevin: So even though the dollar’s rising in this environment of geopolitical stress, and gold is rising with it, the dollar will be a victim of a currency crisis at some point?

David: Well, in essence, we’re setting the stage for that, a currency crisis. It remains masked by the weakness of our global peers. To the degree financial pressures emerge elsewhere or geopolitical tensions are exacerbated from this point, that trend of perceived dollar strength, it remains intact, but it does set you up for that trapdoor moment.

Kevin: Isn’t it amazing that with or without the US western investor, gold is rising? That’s got to encourage you. When we hit a new high, sometimes people will say, “Well, then that’s it. We’re going to go down.” But how long have we been building this new floor? Not ceiling, but floor. I mean, this is a stable platform. Are we, what, 10, 12 years into this right now? We’ve got a platform for a rise. Whether we have short-term corrections or not, this is probably going to be the foothold.

You’re a climber. When you go climb on a cliff— I’m not. I mean, heights scare me, but there are times when you make a leap, you find a firm foothold, and then you make a leap for a new high. That foothold’s got to be solid, and we’ve built a 12, 13-year foothold with gold. Calling this a new high might be actually mistaking the fact that it could be a new floor.

David: Yeah. I mean, and heights scare me, too, but what you’re describing is getting to a place of stability, a place where you can rest, and we’re talking about 12 years of consolidation for the gold price. This breakout is very significant.

I think the most encouraging aspect of this move in metals is the non-participation of the Western investor. When they come in, they’re good for another 15, 20% move when they arrive en masse, but do geopolitical tensions, do currency weaknesses elsewhere—whether it’s the yen, the yuan, emerging market currencies—do they draw the price up another 15 to 20% first?

Today, China’s the marginal buyer. Today, they are the ones pushing the prices higher. The US investor, the European investor will enter at some point. Quickly forgotten are the size of the gold and silver markets relative to other assets, and the impact of even a trickle of investor interest. That doesn’t even deal with when floods do occur. Fear is, at a certain juncture, the dominant driver of traffic into gold. I think today, with excessively loose financial conditions, a raging bull market in equities, merger and acquisition activity which is off the charts, there is no fear. There is no flood. There’s barely even a trickle.

Kevin: Well, and for the listener who says, “Yeah, but I don’t know when to buy. I don’t know whether it’s a top or a bottom,” I go back to George, who has been 47 years in the metals industry. He says, “Every day was a good day to buy gold.” He knows that because gold is up, what, six-, seven-fold, maybe eight-fold since he started in the industry. It’s done just fine. But I brought up to George, “Not only does that make sense, but with Vault plan I have the ability—” I just, every two weeks, buy a little bit of gold, Dave. Granted, there are times when something happens where I say, “Well, I’m going to buy more,” and I’ll buy a fistful of gold instead of just a little bit. But every two weeks, just a regular cycle, it comes right out of my account and I buy a little bit of gold. I don’t have to predict floors, tops, geopolitical or geostrategic types of things. I really don’t. I just accumulate over time. Again, the triangle, I build my third of my base and try to make sure that I at least have a third of my liquid assets in gold. I don’t know that price really matters, does it?

David: Fiscal crisis is one of those things that is coming to a theater near you, and not just this theater in the United States, but, as we mentioned, the UK and Spain and France and Germany and so many other countries whose debt levels are unsustainable. We are seeing the retired financial chieftains. They’re reflecting and they’re saying, “I don’t think this works.” I love the CNBC interview with Kevin Warsh, a former Fed governor and actually one of the potential candidates to be the Fed Chair. Maybe that’s why he said it in this tone, but in a tone that is markedly critical of the current monetary policy posture. He says, “Process matters. Institutions matter. I’m a little less impressed about the strength of the US economy today. The Treasury department, the Federal Reserve, for the best intentions I’m sure, are goosing this economy. Massive government deficits at times of prosperity, a Fed promising to cut rates even as asset prices are melting up, looser policy. The rest of the world, especially our allies and adversaries, look at us, and maybe they’re impressed by GDP growth, maybe they’re impressed by the stock market, but I wouldn’t say they’re overly impressed by the US economic engine. The engine seems like it’s being stimulated even at a time of full employment.”

When I think about those comments, that moment of honesty, that moment of reflection, I do think, “Where is the price of gold and what is it reflecting?” Keep in mind that for gold to take out its old highs back in 1980, adjusting for inflation, using CPI as a reliable measure, questionable as that may be, we have to surpass 3,600 an ounce. So 2250, do I mind looking at gold today? No. I guess the question is, do I mind looking at dollars today? Do I mind looking at yen today? Do I place my bet in the currency of choice globally, which is a better bet than gold? On that basis, I’d say, “No, absolutely not. Not interested in greenbacks, you can keep them. Not interested in yuan, you can have them. Not interested in yen. Not interested in euros.” I can’t find a currency that is more compelling than the oldest currency ever: gold.

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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 you can call us 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.

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