EPISODES / WEEKLY COMMENTARY

Inflation Is Slow Poison To Your Savings

EPISODES / WEEKLY COMMENTARY
Weekly Commentary • Jan 25 2023
Inflation Is Slow Poison To Your Savings
David McAlvany Posted on January 25, 2023
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Inflation Is Slow Poison To Your Savings
January 25, 2023

“Energy in the financial markets is a combination of risk-on dynamics coupled with the unwinding of hedges feeding into very painful short covering. You’ve got the Value Line Arithmetic Index of companies as the average listed company of 8% year-to-date. We’re three weeks into 2023 and 8% is your average appreciation. You call this normal, but it’s not. The Dow and the S&P are a fraction of that. Dow’s barely at 1%. But nonetheless, a lot is riding on the Fed’s direction next Wednesday. That could be an inflection point for markets.” — David McAlvany

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

We had a really special time yesterday morning, Dave. One of the guys who worked here for I think 41 years, I worked close to him for about 36 of those years. But you’ve remembered him since you were what? Five years old. He came to visit. He had retired last year. We miss him dearly. He lives in Texas, but he came to see the old guys. And we had a table full of people who still are here at the office. The company’s 51 years old. He was there for over 40 of those years, and you remember him growing up. We talked about it afterwards. That’s what life’s all about, is those relationships.

David: You can put a lot of people around a table, and very rarely will you have as much to reflect on, to reminisce about, and to appreciate.

Kevin: Just comfortable laughter, too. You don’t have to explain yourself. You’ve been through the ups, you’ve been through the downs.

David: But that comes with time. It comes with commitment. It comes with an appreciation, and it was a good reminiscence. 

Kevin: We talk about gold being a preservation vehicle, something that holds value over time very consistently. And last night when we were sitting over our scotch and talking, we actually were talking about how those relationships are like gold. They hold their value, and actually they get to be more dear the more the years go on.

David: As time has gone by. We’re now in our— We’re coming up on 16 years for doing the Commentary. We’ve met almost every week at one restaurant at table 30, and approached the door last night and there’s a new menu and a new set of hours, and it includes Tuesday through Saturday. Monday is out, so our classic Monday evening meet at this particular spot, it looks like we may be dealing with a rupture in the routine, which I’m sure we’ll manage.

Kevin: I called my wife. Yeah, I called my wife and I said, “Deb, you’re not going to believe this, but this is the first Monday night we can’t meet at the restaurant that we’ve been at for so many years.”

David: So we went down the street, and they sat us at table 23, which, I guess we can adapt and change. This is enough—

Kevin: Well, and you told this story, and they brought us a free cheesecake with a little candle in it, saying, “Well, maybe this is a new tradition.”

David: They appreciated that we’ve been doing something for 15 years.

Kevin: When you got to the restaurant last night though, you got there a little bit late and you said, “I’m sorry, I was meeting with a young couple.” And you shared with me what you were talking about, Dave. Oftentimes, the meetings that you have are not necessarily about what people think the meeting is going to be about, which, they may come into it thinking, “Well, we’re going to talk about money.” You talked about something else.

David: Well, just like our friend who’s now living in Texas and worked with us for 40 plus years, there’s something of enduring value. I was talking to this young couple about just the nature of their relationship and how important it was that they focus on the things that will enable their relationship to go the distance. As much as they’re interested in financial security, I did put it to them fairly plainly. If you don’t care about your relationship and you’re not investing deeply in each other, good luck with seeing this last. And so all the fruit of your labors, all the efforts and the savings and the investment and the decision-making process, I don’t mean to be fatalistic, but you can just divide things up and go your separate ways now if you’re not going to be very intentional about making this a good relationship.

Kevin: Well, and you’ve got to think about putting something away for tomorrow.

David: Well, so we’re discussing with this young couple the role that gold has in a portfolio. They’re unfamiliar with the reasons that that asset class should be in the mix. So there was an opportunity to explore the role of gold today compared to the past, and different periods in time. And in a nutshell, like cash, gold is a source of liquidity which allows for future investment in other asset classes. 

So its role as a currency for most of recorded history and as a stable store of value stands in contrast to your other liquidity options. Things that we think of today, cash and currencies, which are obviously more managed, and frankly through time are typically inflated away if given enough time. So stable value is what you want from a currency. As you work, as you save, in essence, you’ve got to live beneath your means. The excess income is available for a host of investments as and when those opportunities— talking about really compelling value propositions as they present themselves.

Kevin: And when you got there last night, you told me that you were playing around with something. And actually it was shocking to me, but not, that you could actually go to the Bureau of Labor Statistics and they have a little gizmo there that you can type in a year and see just how much the dollar has lost value, devalued during that period of time.

David: Well, see, here I am trying to make the case that you live beneath your means and you save, and you don’t have to invest every dollar. It’s okay to have cash. But on the other hand, we’ve got this factor, inflation, and I was curious about the details and implications of the new shift in methodology for constructing the consumer price index. And while I was at the BLS website, which was largely unhelpful, I played around with a widget under the data tools section called the inflation calculator, and it allowed me to plug in any year and see the impact from CPI, the consumer price index. It measured inflation on the purchasing power. 

So I’m assuming that they’re using current methodologies and then just pushing those back through time. That caveat is key because most if not all of the methodological shifts have had the effect of reducing the CPI figure. And of course, that obscures the historical levels of inflation and provides a look to inflation, which is like inflation light or a diet version of CPI.

Kevin: So it might be understated. But even understated, it was shocking.

David: Well, that’s right. I started with my dad’s birthday in the 1940s, and $1 in the year of his birth would today require $21.35 to match it.

Kevin: Wow.

David: So that leaves exactly 4.68 cents of purchasing power left if you brought the old dollar into the new world. And I then went to my birthday in the ’70s, matched $1 of spending then to what be required today to buy the same stuff, $6.36.

Kevin: Wow.

David: 37 cents, I’m sorry.

Kevin: Wow.

David: In essence, a six times increase in cost since I was born. Coming forward in time, the benign effects of inflation since the year I got married, rather than look just in the ’40s and the ’70s —and we haven’t been married that long, 23 years—76% is the impact. One dollar 23 years ago today requires a $1.76 to buy the same goods and services. Then I went to all of my kids just to see more or less what was going on there. And we have a young family.

Kevin: And this is when you take it personal. Because when you actually go back and say, “Okay, how much more does my son have to spend than he did back when he was born for the same type of thing?”

David: Right. Because if you think about my dad, it’s dramatic, but it’s also disconnected. From $1 to 4.68 cents.

Kevin: Yeah. But now, you’re mad.

David: Well—

Kevin: Now, you’re mad.

David: In my eldest son’s short lifespan, 16 years, born in 2006, $1 then requires a $1.50 today. That’s 50% more in order to buy the same baskets of goods and services. That’s not a long time for the ravages of deliberate monetary policy objectives to have their effect. We can console ourselves if we want to run the math in reverse, take 50 cents and divide by $1.50 and we still have 66% of our purchasing power intact. And it’s actually that same math in reverse that left my dad with 4.68 cents in purchasing power.

Kevin: Well, and we’re not all probably going to be able to work until the day we die. So for the person who is planning for retirement, they have to plan for that degradation and then still try to figure out how to pay their bills.

David: The reality is they just live with greater and greater sense of frustration and anxiety. The reality of inflation, even at a seemingly benign level, targeted at 2%, over time, that erodes purchasing power and requires more dollars to buy the same goods and services. So the BLS inflation calculator, it’s testament to the damaging effects of inflation and the pressures it creates for households trying to get ahead. 

And so for this young investor, this young couple, imagining a world where investments someday supplement income and allow for either a reduced professional engagement, maybe you work a few days less and continue on just at a different pace, or full-blown retirement. There is the reality of saving, maintaining some dry powder while staying in the hunt for value-oriented investments.

Kevin: And liquidity is so important to have so that you can make those investments. It’s just, what do you put your liquidity in long term?

David: That’s the dry powder, liquidity. Your liquid assets are a form of potential energy. You’re intending to deploy them, preferably when an asset class represents a good value. So patience is a part of the process. Patience implies time. You look back and say, “Okay, the markets are cyclical.” You’ve got business cyclicality, booms and busts, and asset classes are affected by that. It leaves all asset classes on a roller coaster of way too cheap at one point moving to way too expensive. Paying too much for an asset is rarely a recipe for success. So there comes a point where you just have to wait. You have to wait. So you have a category in your portfolio that’s designed to be liquid, intended for deployment, and waiting opportunistically, but as it waits, even over a short period of time, it means that fiat currency is working against you. Time is not your friend with fiat currency.

Kevin: It makes me think of going uphill on a down escalator. If you are walking slowly up an escalator that’s going down quicker, you’re not going to be able to get to the top. And so if you think about currency as one of those down escalators, you’ve got to find a way around that for the long term.

David: Well, and currency is not supposed to be constantly devaluing. It’s not supposed to be the down escalator, but that’s what it’s become in a managed system. There is a role for cash, but what I’m highlighting is the traditional role of gold as a more reliable form of liquidity or cash, through the decades, centuries, even millennia. 

And this is in large part why we launched our Vaulted program—as a cash alternative, as a liquidity vehicle with an embedded economy of scale. You can buy the cheapest bars at a very good price. Why? Gold is a store of value. It’s a store of wealth, plain and simple. 

So if I looked at all the wealthy families that I’ve had the opportunity to engage with, I think a wealthy family maintains gold as a ballast asset regardless of circumstances. But there are times that utilizing liquid resources is truly compelling. And exchanging ounces for acres or ounces for shares in a company, it’s the smartest thing you can do as you allocate your wealth. This is a process. Building wealth takes time, but in a world of fiat money, you’re fighting against time, not effectively using it to your advantage.

Kevin: Yeah, you’d hate to just leave all this to luck. Yes, you want to be able to guess right. But you’ve got to have something that luck doesn’t play a role in.

David: The tendency today is to try to compress time through speculation. Wealth building has become characterized as a speculative and manic process where you take crazy risks for crazy gains. And clearly some people, if you talk about folks that walk into a casino, they have better luck gambling in casinos than others. I have a cousin who paid for his MBA playing blackjack, so maybe there’s some skill.

Kevin: That’s rare.

David: Maybe there’s some skill, or perhaps it’s really a lottery of numbers in which everyone has the same luck, but a few fortunate souls fit into the skinny part of the winner’s bell curve. The house wins most of the time because the math is skewed that way. Investing has in some sense become like a casino, obscuring the traditional process of value hunting where some skill is applied. It’s needed. It’s no longer a game of skill. It’s a game of odds, averages, resting on the belief that you win over enough time, except in this context we’re saying that time is now your enemy.

Kevin: Sometimes, you have to rephrase something because names sometimes take on different meanings. The meaning of capitalism today may not be the meaning of capitalism a couple of hundred years ago. So what you’re talking about when you use the word value hunting, capitalism is really the ability to hunt for value. Is it not?

David: That’s right. It’s a process of saving and allocating capital. To me, this is how connected gold is to that story. The why of gold is most simply embedded in this story. Time and liquidity are either your friend or your enemy. You can factor in interest rates. Price stability of course is a part of what we’re talking about. But if you just said it differently, capitalism is the opportunity to allocate savings, capital as savings, into productive ventures that in your estimation will make profits. And those profits justify your provision of resources to someone else’s endeavors. It takes time, price stability stays in focus as a priority. But through this extended period of time of saving and allocating resources to which you think are productive ventures, something does not change. And that is the value of an ounce of gold. An ounce of gold buys roughly what it did when my father was born in spite of the shifts in fiat currency.

Kevin: And speaking of your father, he was a stockbroker in the 1960s and early ’70s. And when Nixon closed the gold window, he realized that what you’re talking about, that was the beginning of the end of the buying power of the dollar. So he started putting gold into his friends’ and clients’ portfolios at that time. That was a very early-on great decision.

David: Yeah. I think what that represented is an acceleration of a trend. It allowed the monetary system to catch up with the fiscal largesse, which had already been eroding the stability of the Bretton Woods system. It’s the shifts in currency stability over time that have so dramatically repriced gold. And there’s a variety of reasons, again, for that instability. 

When you’re looking at the stable store of value which gold represents, go back to that period of time, the era of the gold standard. A one ounce gold coin, the $20 gold piece, which is you just shy of an ounce 0.9675 of an ounce, it had a one-to-one value with a $20 bill. Today, it takes nearly 100 of those bills for the same amount of gold. 95 bills, actually. 

So we go from a one-to-one ratio of gold to fiat currency to now a 95 to 1. Gold value higher or is it dollar purchasing power lower? And frame it as you like, price stability is important. But as it’s currently conceived, as it’s currently being discussed in monetary policy circles, it’s not that gold preserving value through time. It’s more like a rolling stone aided by gravity on its downhill descent.

Kevin: So you talk about price stability, and the Federal Reserve is supposed to maintain price stability, but they’ve been given other mandates. How do you maintain price stability if they have all those other mandates?

David: We joke about the third unofficial mandate, which is market stabilizer. If they don’t like the stock market moving too low, they goose the system a bit.

Kevin: Right.

David: But they actually do have two official mandates. And I was listening to NPR on the way to work earlier this week, and was intrigued by the discussion of Federal Reserve policy and the Powell decisions that lie directly ahead. We’re now in the blackout period ahead of the Fed’s next interest rate pronouncement. That’s on February 1st. To fight inflation, which is now over the tolerable thresholds, they have to continue to raise interest rates. But to what degree and for how long? That’s what’s in play. 

The comments on NPR made me chuckle. Balancing the social concerns tied to one mandate—maximum employment—with the other mandate—the 2% inflation target—would be a challenge, and is a challenge, said the commentator. And again, it made me smile. And I might have also yelled something inappropriate into my windshield, but 2% inflation targeting, is that the second mandate? Did I hear that correctly? I thought price stability was the mandate, right? 

Curious, isn’t it? How meaning shifts over time, and the original mandate, price stability, becomes defined as something actually it’s opposite. Should I imply from the Bureau of Labor Statistics’ CPI calculator that my son’s short experience with 50% inflation from birth to driver’s license is somehow benign, that that represents price stability? No. The success story of the Fed is really the story of middle class sacrifice on the altars of monetary policy, and pundits applaud the success of 2%, ignoring the collateral damage. 

Economists argue for an even higher inflation target because in real time they believe the people can’t tell the difference between 2% and 3, or maybe even 3% and 4. So NPR makes the verbal slip, assuming that a 2% target is actually a part of the monetary policy framework. And there’s confusion, I grant you. It takes someone special to care about monetary policy [laughs]. 

But we know that maximum employment was an objective that was adopted many years after the Fed’s creation. It originally was only one mandate, price stability. 1977, in fact, was when they brought in maximum employment. Price stability was a singular mandate from 1913 through 1976. Now, we accept that the creation maintenance of inflation at a subliminal level—below the threshold of a conscious awareness—is what price stability means today. Have we lost our minds?

Kevin: Well—

David: No. No, we haven’t. 

Kevin: Because when you’re being slowly poisoned— Do you remember the book? Well, of course you do. Extraordinary Popular Delusions and the Madness of Crowds, written in the 1850s. One of the chapters is about slow poisoners. And a slow poisoner, the way you get away with slow poisoning is you keep it subliminal, under the threshold, until the day it kills the victim. And that’s actually what this is. But the economists would say, “No, no, no, that’s not slow poisoning. We’ve got this.”

David: The dominant economic theories today argue that this is a better way towards economic growth. To create inflation, according to the current view, axiomatically is to create economic growth. To be fair, not all economists agree. If you go back to the National Bureau of Economic Research Working Paper 6062, this is 1997, “Does Inflation Harm Economic Growth? Evidence for the OECD.” It’s the title of the paper if you want to read it, Working Paper number 6062. Does inflation harm economic growth? The conclusion in this NBER paper is, yes. Yes, it does harm economic growth. It does not create it. And yet we’re operating with the dominant economic theory today being, we have an inflation target because it creates economic growth. Contrary, contrary to what some economists have argued to the opposite.

Kevin: Wasn’t Frederic Mishkin one of the authors of that paper?

David: A different one. A different one. But just as a reminder of ideas having consequences, and ideas and arguments mattering, who won the argument? It was Mishkin and Ben Bernanke. Of course, we remember Ben probably better than Mishkin because he was former head of the Federal Reserve. They both co-authored a paper, also from 1997. They wrote it for the Journal of Economic Perspectives, titled “Inflation Targeting: A New Framework for Monetary Policy?”

Kevin: So they were proposing what you’re saying. In other words, they’re saying inflation does create economic growth.

David: Yeah, yeah. Following on the experiments from the New Zealand Central Bank less than a decade earlier, they proposed a better way for implementing discretionary monetary policy. Far more ad hoc, less rules-based, completely ignoring the guidelines of the original Fed mandate, price stability. They’re making the case that we need to re-appreciate, we need to re-understand, we need re-educate ourselves as to what the benefits of inflation are. Again, 1997, “Does Inflation Harm Economic Growth?” National Bureau of Economic Research says definitively it brings economic harm. It damages income. And yet the argument that won the day, “Inflation Targeting: A New Framework for Monetary Policy?” They won the argument. Mishkin and Bernanke won the argument, and we live with the consequences.

Kevin: Well, and the consequences are that your dad has to spend $23 more than what a buck bought.

David: Oh, no, no, no. $21.35 cents.

Kevin: Oh, 21.

David: Yeah.

Kevin: Oh, gosh. Then it must not be bad. And you have to spend over six more since you were born. Your son, he’s only 16 and he has to spend a buck-fifty for what a buck cost when he was born.

David: As a simple capitalist—

Kevin: That’s the cost. You know Mishkin, I’m going to just throw Mishkin in real quick because it’s a little history here with the company. I was in my money and banking class in college. I was 24 years old. I was a ways further. I was working a full-time job and going to college, and the book on money and banking was written by Mishkin. This is back in 1987. And I started seeing this stuff. I was no economist at the time, I’m sorry. I started seeing this, and it was like, “Wait a second. This seems fraudulent. This seems fake.” And I started reading your dad’s newsletter that year, 1987. That’s when I came, and I interviewed, and I said, “I got to work for you. I got to work for you.” But it was Mishkin, the same guy who wrote the paper with Bernanke, that praised inflation. It was actually, that was the pathway here because it didn’t seem right. It seemed like somebody was getting ripped off.

David: Well, again, I come back to this conversation I had with this young couple. Who am I? I’m a simple capitalist looking for value in the context of the ebbs and flows of the financial markets, and I prize price stability. That’s the discussion I had with that young couple. It means that the measuring stick of value doesn’t have a flexible component as much as prices do move because of the market’s value discovery process. The underlying reference point should not also move—the currency. Yet by accepting inflation targeting as the new understanding of price stability, we concede that our measurement system is not constant. It’s acceptable that it’s an ever-diminishing measure.

Kevin: But it was constant for a while. And look at the explosive growth from around, what?, the 1870s until 1914, when we were, worldwide, virtually on a gold standard.

David: Yeah. And I think you can apply this to a various periods in history. The great leaps forward in recent centuries, certainly as you’re referencing, in terms of economic growth and development, they were accompanied by a reliable and stable currency. Contrast that today, where our new version of a leap forward is based on financial engineering leverage and the creation of limitless quantities of money and credit. The gradual devaluation of the underlying currency, it’s like measurizing or atomizing debauchery. So this was a discussion point at the dinner table in our family. The Clinton equivocation on defining sex in the Oval Office.

Kevin: Oh, it wasn’t in the Oval Office.

David: No, you’re right. It was the butler’s pantry next to the Oval Office. But that equivocation on the meaning of a word, I think that’s moved over to Maiden Lane, which is the headquarters of the Fed, on inflation. We’re only doing it a little, which is very different than doing it a lot, right? Interesting, isn’t it, that ad hoc policies got us into this mess, but we’re comfortable with the notion that the Fed applying ad hoc policies, including inflation targeting, that’s going to get us out of it. And I think what that speaks to is how disinterested the public is in economics. Yes, it’s dismal. Yes, it’s boring. Maybe we changed a little bit of that perception today. Is there a connection between monetary policy and sex? Maybe.

Kevin: Well, long pause. Long pause. And then we move to— At least Wall Street. They assume the Federal Reserve’s just going to continue to goose it.

David: Well, thank you for that. Financial conditions are incredibly loose on the belief that the Fed will be less aggressive and shift to a dovish stance as inflation statistics continue to fade. Last week, my favorite quote of the week, the CEO at Unilever referencing peak inflation being behind us, but then going on to say that the peak in prices is still ahead on the horizon.

Kevin: So peak inflation is behind us, but peak prices are still coming.

David: Exactly. It was great, because some CEOs are clued into statistical and definitional chicanery—from the Clintons forward, and from the statisticians from the bowels of the BLS. But there are real world implications to the monetary policies that get put in play. And just since the beginning of the year, again, on the belief that financial conditions are loosening and the Fed is going to be less aggressive because inflation is behind us, we’ve got the Goldman Sachs Most Short Index, which is up 18% year-to-date.

Kevin: Well, why don’t you explain that? Because when it’s on the Most Short Index, it’s basically saying these are companies that are just garbage and we’re going to short them. They’ve shorted these stocks, which means they’re betting that they’re going to go down. That’s not happened. That’s reversed. Those bad, bad stocks are going up right now based on— You fill in the blank, Dave.

David: Yeah, the three Ds, date with destiny, in this case, demise. They deserve bankruptcy, and yet they’re getting an extra pop because, well, people who were shorting them on the assumption that they would go out of business—

Kevin: Like a Bed Bath and Beyond.

David: —are now having to cover those shorts. And we talked about radical pricing, 42% in one day, several hundred percent in just a matter of three, four days. Those kinds of radical jumps, higher, that’s not the characteristics of a new bull market.

Kevin: That’s not value. That’s speculation. Right, yeah. GameStop completely saying—

David: It serves as evidence that energy in the financial markets is a combination of risk-on dynamics coupled with the unwinding of hedges feeding into very painful short covering. So you’ve got the Value Line Arithmetic Index of companies has the average listed company of 8% year-to-date. We’re three weeks into 2023, and 8% is your average appreciation. You call this normal, but it’s not. The Dow and the S&P are a fraction of that. Dow’s barely up 1%. But nonetheless, a lot is riding, a lot is riding on the Fed’s direction next Wednesday. That could be an inflection point for markets. 

There are mixed currents. Doug highlights some of this in his weekly Tactical Short client update. He said that the economic data, with December retail sales down 1.1% and producer prices down a half percent, were below expectations. Both were consistent with the Wall Street narrative of waning inflation, mild recession, and a more dovish Federal Reserve. Declining Treasury yields are consistent with this thesis. Most other markets are not. Corporate debt is off to a strong start in 2023—not what one would expect heading into a recessionary environment. Stocks have been strong from the banks to the industrials to the small caps.

Kevin: And then you’ve got commodities, you’ve got copper and oil showing.

David: Well, I want to come back to retail numbers because you’ve got, ex- auto and gas sales, the figures were down -0.7. Unchanged is what was expected. You add to the “I am concerned about recession” argument that industrial production was lower, capacity utilization was also less than expected. We had, in recent days, the New York Fed’s Business Leader Survey showed significantly declining business activity, wage increases which are continuing, and no expectation in this survey that conditions will improve over the next six months. This is the kind of small business feedback consistent with a recession.

Kevin: Yeah. But on the one hand, and on the other hand, because copper, Dr. Copper is still up, and oil is up.

David: Exactly. Depending on the stats you elevate, you can make the case for recession or not. Yield curve has only been inverted this much once in history. But to Doug’s point, financial conditions are loosening. Corporate credit is showing no signs of stress. Where do we go from here? You’ve got commodities which are mixed, copper leading the charge higher into double digits, year-to-date double digit gains. You’ve got a few other industrial commodities which are strong with an upward bias. Oil’s trading up a few points. Natural gas is lower by 20% year-to-date. At its worst, it was down over 30%. Gold is up 5. Silver’s flat.

Kevin: Mixed signals.

David: Right.

Kevin: Yeah.

David: If Powell is compelled by financial market speculators, again, high risk assets are ripping higher. Crypto, meme stocks, small caps, semiconductors. If he’s compelled by financial market speculators and perhaps responding to an inflation surprise—because keep in mind, copper and the CPI are often connected, gas prices are up 32 cents over the last month—he may feel compelled to take a harsh and hawkish tone on inflation next week. And in that event, the dollar could rally and stocks sell off.

Kevin: Slap the hand.

David: Yeah.

Kevin: Slap the hand.

David: Yeah, exactly. So oftentimes when we think about the dollar rallying, the knee-jerk reaction to US dollar strength places the precious metals under short-term pressure. And I think as we look at the commitment of traders reports, it certainly supports a short-term selloff in precious metals and a short-term rally in the US dollar. This is the opposite view of our medium- to long-term perspective, which is the dollar has a rough road ahead of it, and gold has an interesting and intriguing upside.

Kevin: But doesn’t this go back to what we started with? Gold will fluctuate in the short run, but look how consistent it is. Your dad— Has gold gone up 21 times since he was born? Yeah, it has. Has gold gone up six-fold since you were born?

David: Mm-hmm.

Kevin: Yeah, it has. And has it gone up 150% since your son was born? Yeah, that and more. So the truth of the matter is, yes, we may have short-term sell-offs, we can speculate on short-term price moves, but for the preservation portion of a portfolio, for the part that you’re trying to keep liquid long-term for those opportunities that will come— You often talk about exit strategies, Dave. The exit strategy on gold is, hold it until something that you really need comes along, and it’ll buy the same amount of that thing that it did 50 years ago.

David: What I like about when we’re talking about asset classes versus just consumption, if you’re talking about consumption, it may buy you the same stuff that it once bought you. But again, if you’re comparing it to asset classes, asset values fluctuate constantly. They’re up and they’re down and they’re up and they’re down. You have as an asset allocator, as an individual investor, the opportunity to put money to work when it is most compelling to do so. The simple adage, buy low, sell high—

Kevin: Value hunting.

David: —it applies. And you’ve got these things that are in motion, a strong dollar. Coincidentally, at least three countries would be pushed over the edge and likely default on the next major dollar rally. And this is Zambia and Lebanon and Sri Lanka, and Ghana is certainly in the mix now as well. And there’s actually— Between 75 and 80% of debt that’s financed overseas is in US dollar terms. So as the dollar rallies, the ability to pay back and what becomes a compromised debt position, the burden to pay back that debt becomes much more challenging. It’s known as the original sin. 

And I think we are in many senses on edge in terms of the debt market dynamics. And today we look fine, but you get the dollar moving up a couple points, and all of a sudden you’re back under pressure. Folks that are going to the IMF and World Bank and begging for money, or they’re going bankrupt—with the ramifications into the financial market that holds. In all of that, there is opportunity to take positions. A modification from dry powder cash to dry powder ounces. I think that modification is frankly about to be compelling.

Kevin: Dave, you mentioned Ghana, and something really hit me this morning when we were in our meeting, that Ghana is openly saying that they would accept gold for oil. We’ve talked in the past about how dangerous it will be when internationally countries start accepting other currencies for oil and start to set up maybe another reserve currency block.

David: Well, I think there’s a difference between the desire for change and actually seeing change occur. So yes, the notion of de-dollarization and a shift to settling transactions, trade and whatnot, in other currencies. This is a reality, particularly as a desire. But it’s not necessarily a reality as in something that is upsetting to the existing system as we understand it today. Give you an example. Financial Times puts to pen Brazil and Argentina’s negotiations. They started this week for a regional currency. They like the equivalent of the euro, and they already have the Mercosur, which is a trade collaboration between, I think, I don’t know, 5, 6, 7 countries in South America. Well, a Brazil/Argentina regional currency, like the euro, is supposed to be a helpful tool. But you’ve got these two countries—Brazil, maybe it’s 20, 30% inflation, no big deal. Argentina, 100% inflation. You put these two things into a bowl, what do you have? I would suggest they call it the excremento, the appropriate name for the currency. But—

Kevin: We’ll keep that out of the title, I think, the excremento.

David: Okay. But what I’m getting at is there’s a desire for change, and it’s notable, but the ability to execute on that and make something happen, where’s the credibility? 100% inflation, where’s the Deutsche Mark? Where’s the European Central Bank, which is hinging on the German Central Bank’s credibility? To do something that is potentially able to displace it has to have sufficient substance. And to date, that doesn’t exist. Lots of ideas, a lot of noise, but not a lot of substance.

Kevin: And they’re needing to do that because we’ve been irresponsible with the dollar. 

You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick along with David McALvany, and you can find us at mcalvany.com, M-C-A-L-V-A-N-Y.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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