Powell On Inflation: “Dismissive”

Weekly Commentary • Mar 27 2024
Powell On Inflation: “Dismissive”
David McAlvany Posted on March 27, 2024
  • Gold Soars In Yen, Euro, Swiss Franc, You Name It
  • Turkey: Inflation 67%… Raises Interest Rates To 50%
  • How “Celebrity Endorsed” Gold Companies Are Paying For The Endorsement

“Gold is breaking out in every currency. Currencies are breaking down. The rough translation as the world’s central banks deal with unmanageable debt and deficits: gold is breaking to new levels measured in virtually all currencies. The rate of change is different depending on your geography. But wherever, inflation is the greatest threat. There, demand will continue to spike.” —David McAlvany

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

Higher for longer. Higher for longer. What’s meant by that, actually?

David: After last week’s meeting with the Fed, and Powell’s press conference thereafter, Bill King says that now we get it. When Powell and his ilk kept asserting higher for longer, they were not talking about interest rates, they were talking about inflation.

Kevin: History shows, and I was even reading this in the book, Dave, that you’re going to interview Neil Howe here coming up in a couple of weeks. Talks about how governments, when they’re at the last part of their cycle, they pay their debts off with inflation. I guess it’s becoming more and more apparent that higher for longer is that the Federal Reserve is actually going to have to just be okay with inflation, because this is the end of the cycle for—how many trillions?

David: This is no surprise. If you look at almost how textbook this is, although it’s not something that you can reference or point to, because obviously no one wants to be taken advantage of. And yet, that’s exactly what happens at the end of a credit cycle. You either default or you print it away. Those are the two options. Given how connected the creditor universe is, the idea of a mass default, I think the probability of a mass default is less than the inflation alternative.

Kevin: Would you say this is for the history books?

David: Absolutely. Particularly last week.

Kevin: Yeah.

David: Last week is a meeting for the history books, announcing you’re on track to reduce interest rates, even as inflation is experiencing a secondary resurgence. There’s secondary effects attributable to multiple pressures. Just think about that. You’re supposed to increase rates to make it go away. It’s not going away. We’re going to reduce the interest rate anyways.

With inflation, you’ve got dysfunctional supply chains, you’ve got tight labor markets, you’ve got excess liquidity on the Fed balance sheet, a bloated general account. The overnight reverse repo facility, which is still very robust. All of these sources of liquidity feeding the financial markets. And then of course you’ve got the financial market liquidity generated from asset bubble inflation, which creates its own liquidity. And Powell comes into the meeting and projects throughout it that he’s judging the current market as sufficiently restrictive. And it almost feels like saying that a cat with a collar and a field full of catnip is sufficiently restrained.

Kevin: Well, and truth be told, let’s just call the truth tellers this time—gold, oil, bitcoin, stock market—they were like, “Yeah, let’s go.”

David: Well, that’s what you saw. Kevin, I do think that the reasons are different. But if you look at gold, if you look at oil, if you look at bitcoin, if you look at the stock market, they reacted as you would expect with inflation being tolerated and rate cuts being affirmed. New highs for gold, north of 2,200. Big bounce in bitcoin, a ripping equity market. What could go wrong?

Kevin: Oh, nothing. Nothing. Yeah.

David: This is where, because we live in an exceptional country with exceptional leadership, and we’re already on an exceptional fiscal path, I think you’re right. Nothing at all. Nothing can happen, not of a negative nature. Those are the factors in play. You look back at last week, the reason why this is one for the history books is because you’ve got rate cuts coming. You’ve got a Fed which is not concerned about inflation data, a Fed that sees the story improving.

Kevin: I love that you used the word story.

David: The story.

Kevin: Because that is the narrative, isn’t it?

David: I think Powell used those words five or six times. We see the story. The story hasn’t changed. The story. Ah, the story. It was like a return to the script. And yes, there’s narrative. There is a paradigm which he cannot get off of. And as for data dependency, and that being what their story is going to be predicated upon, consistency with the narrative based on the data as it unfolds. What utter balderdash. The story, if it is such, is not the one that he was telling.

Kevin: Well, and the Chinese got a taste of the story maybe not matching the reality, right? They had to reverse their action last week.

David: Yeah, very different story overseas. Chinese peg on the currency loosened last week, and all hell broke loose. And it forced the currency trading ban to be tightened again. It required the big banks, state-owned banks, required them to come in and sell dollars, buy yuan to stabilize the currency. And there are long conversations in-house, in our office, about the troubling global debt picture, which in and of itself has many fascinating investment applications.

Kevin: Well, look at the currency fluctuation.

David: Yeah. The currency story continues to be a routine topic that we cover and come back to, because currency instability and massive foreign currency volatility is what should be expected with cross-border leveraged bets. And these are not insignificant bets. We’re talking about trillions of dollars that these cross-border bets sum to if you’re talking about the carry trade dynamics. The two currencies central to the drama, in our opinion both present tense and future tense, continue to be the yen and the yuan—or if you prefer to call it the renminbi, RMB—but the yen and yuan.

What history suggests is that currency and stability anywhere in the world has knock-on effects everywhere, particularly after a period of globalization. Financial market pressures, forced liquidations of trades, these are things that become all too common once the fireworks begin. And here we have the yen continuing to threaten to break to lower levels.

Kevin: Well, and you’re talking about breaking to lower levels against other fiat currencies. Dave, the yen’s breaking to the lowest levels against gold, along with these other currencies. Gold normally has— People think gold actually rises. It’s the currency that falls, there’s an inverse pricing. Gold goes up when the currencies go down.

David: It was interesting, we finish our regular meetings on Tuesday morning, and Morgan’s last comment was, “If I had a word to describe the Fed and their position taken on inflation and rates, the one word would be dismissive.”

Now, when you frame what’s happening with currencies, just take the gold chart in any currency and invert it. And what you have, in a word, is collapse. We tend to see the price of gold rising in yen, rising in rupee, rising in dollars, rising in pound sterling, rising in euros. And yet if you invert the chart, what you really see is the story of the currency. And we have a hard time thinking gold up, currency down. So just flip the chart, invert it.

Kevin: Yeah. Currency down.

David: Currency down. That’s the currency down. Yeah, the word to capture the yen in gold terms, one word, collapse. That’s all it is. That’s all it is. As we’ve often commented, the level of gold is really the inverse of a given currency. One ounce of gold in yen sits at near all-time highs. Again, looking at it on the right side up instead of upside down. 332,000 yen. In euros the gold price per ounce is now 46% above its 2012 peak.

Kevin: That was when gold made its spike way up and came back down. It’s already 46% above that peak—

David: —in euro terms. So we’re breaking the 2000 euro level for the first time. And of course this goes, again, back to 2012, the period. It’s signaling gross currency underperformance in the euro over the last 12 years, that in dollar terms we’re just now breaking out. And yet in euro terms we’re 46% higher than where we were a dozen years ago. In yen terms, we’re nearly 100% higher than where we were a dozen years ago. In rupee we’re nearly 100% higher. Again, in Indian rupee, gold is just shy of 100% higher since the 2012 peaks. Inflation in India has been acute. Rupee devaluation, tragic. And the gold price and the picture tells a story.

Let’s look at the strongest currency in the world, Swiss francs. Gold is 17% above its 2012 highs in Swiss francs. One of the strongest currencies in the world. It’s breaking out above its multi-year ceiling as well, in Swiss francs. Gold is breaking out in every currency. Flip every chart, currencies are breaking down. The rough translation, as the world’s central banks deal with unmanageable debt and deficits, gold is breaking to new levels measured in virtually all currencies. The rate of change is different depending on your geography. But wherever inflation is the greatest threat, there, demand will continue to spike. This week it’s Turkey. Again, Turkey.

Kevin: Okay, but I want to repeat, gold is breaking out because the currencies are breaking down. Right? Gold is breaking out because the currencies are breaking down. There’s other reasons, but that’s what you’re saying.

David: It’s a reflection. It’s a reflection of a devaluation that’s taking place like a slow motion train wreck.

Kevin: But the central banks are showing that they’re doves at this point. They don’t care about inflation. They don’t care actually that their currencies are breaking down.

David: And that’s what we saw, central banks moved mostly in dovish concert last week. Either in deed or using forward guidance words. You had the Swiss, you had the Brits, you had the Aussies, you had the Europeans. Lagarde at the ECB. The two exceptions were Japan—hiked rates from nothing to nothing—

Kevin: Don’t you love that? Zero to zero.

David: It really is unimpressive, negative 10 basis points to zero, or possibly 10 basis points. The level didn’t matter because the differential to other interest rates is still way too wide. Yeah, it’s like saying I salted my soup, there was a single grain. Yeah. Okay. Right. I don’t know that that mattered.

Brad Setser was writing for the Council on Foreign Relations, and explores how much the gap would need to close before international capital flows shift, causing yen investment dollars to stay home instead of flow out, as they so often do. But what he did not adequately account for were carry trade dynamics, those trillions of dollars in leveraged bets financed in yen, invested globally for the spread. And now you have to be cognizant of the currency fluctuations, not just the differential on the yen, but whether you’re hedged or unhedged in terms of the currency fluctuations.

Japan increased rates. They brought something up from below the surface level. It was like unearthing a corpse. The interest rate market is not alive in Japan. But more lively was the 500 basis point increase. 500 basis point.

Kevin: That’s 5% increase, 500 basis points. Wow.

David: In Turkey, 5%, one day. Inflation remains problematic. If inflation remains problematic, two strategies exist. Raise rates, which Turkey is now in the process of doing, they’re up to 50%. That’s five-zero percent.

Kevin: Is that keeping up with inflation?

David: Or the other alternative is you can shrink liquidity in the system. No one likes to do the latter, but it’s far more effective than the former. You shrink liquidity in the system, it starves financial market players, risk asset prices decline—making it the last option, because nobody likes to take losses, but it’s an effective one. On Turkey, your question. No, if your inflation rate is 67%—

Kevin: Okay, yeah. And they’re at 50%, you said.

David: And your interest rate is at 50%. So inflation 67, interest rate is 50. Class, what’s your real rate of return?

Kevin: Wow, that’s like buying a lottery ticket. I’m losing money every time I do. Right?

David: Negative 17%. It might work one of these days. To your point, most days you buy a lottery ticket, it’s a donation.

Kevin: We lose 17% of the transaction-–

David: That’s your donation.

Kevin: —but we make it up on volume.

David: Is there any surprise that there’s gold market activity very strong in the Bosporus? Any surprise at all? If you’re dealing with a 17% negative rate, why wouldn’t you want to have your savings in gold? You’re not going to get paid. You’re being stolen from, and it’s not just our 2% here in the West, it’s -17. Clearly, not to the same degree here in the US. But what Powell was signaling is a tolerance for higher inflation and lower interest rates, lower forms of compensation to savers. Three cuts this year. So we’re going to run inflation hot, we’re not going to pay you as much. That keeps the specter or the possibility of negative real returns on the radar for US investors. Any surprise that we saw gold move higher? No.

Kevin: Okay. But I said something earlier that I need to reframe, because this may be very, very telling, Dave. It’s no wonder that gold is rising against the yen. It’s no wonder that it’s rising against the Rupee or in Turkey, because those currencies are collapsing, but the dollar in relation to those currencies has been getting stronger, and gold’s been going up. It’s been hitting new highs.

David: But we’re just talking about the rate of change.

Kevin: What’s that saying?

David: We’re talking about the rate of change. So if the rate of decline in the dollar is less than the rate of decline in the yen, then it looks like the dollar is strong and moving higher on a relative basis. Where you get some real clarity is pricing gold in a variety of currencies, flipping the chart. Now, what you can see is the rate of decay within each individual currency. So, where you—right side up—have the yen/gold chart soaring, flip it upside down. That is the real picture of the yen. You think, “Well, the dollar is so strong.” Right. That’s right, except when you look at gold in dollar terms.

Right side up, you see gold breaking out. Flip the chart. What are you looking at? You’re looking at the dollar in gold terms, and the dollar is in this permanent trend of decay, and it’s getting worse. The rate of change is increasing. It just happens to be worse in Turkey. It happens to be worse in Japan. It happens to be worse in Zimbabwe. It happens to be worse in Venezuela. It happens to be worse in Argentina.

Kevin: So, the healthiest horse in the glue factory in this particular case—

David: Is the dollar.

Kevin: Is the dollar.

David: Right. Best looking horse. I don’t know how healthy.

Kevin: But isn’t that something to reflect on? I mean, that is important for us to watch because the dollar right now is not falling against other currencies. It may be falling in buying power. That’s the inflation picture, but gold is hitting new highs.

David: Well, but this is an important point, because to the degree that there’s currency volatility, if we go back to the yen, we go back to the RMB, if there’s currency volatility there on a relative basis, we may smell like a rose. It may be an amazing thing, the dollar, resurgent strength, and look how— But actually, it doesn’t matter. We can still have gold going up. We can still have the dollar in real money terms being discounted, where all you’re really getting in a strong dollar is a reflection of greater weakness elsewhere. That I think is what we can expect to see is the fragilities within the Chinese financial system, multi-decade-old mismanagement of the Japanese economy and monetary system reflecting itself in a break within the currency or currencies.

Kevin: But Dave, I don’t want to miss this, because oftentimes people do. They’ll think that the dollar is strengthening because they’ll look at it relative to other currencies, but it is actually weakening relative to gold. So, all currencies, virtually all currencies right now are weakening relative to gold. You talked about this being historic. We are in a historic time at this point because you said gold is breaking up, and currencies are breaking down.

David: Well, let me put it in different terms. Let’s think about trading dynamics in the way that either a commodity trader or a currency trader, who’s got the nanosecond attention span, would look at the market. If you’ve got strength in the dollar, axiomatic for the trader to say weakness in gold, but this is something to reflect on because in this recent two-year stretch, and this is not an isolated two-year stretch, there’s other periods of time where this also held. The dollar has strengthened. Rates have increased by 5%, 500 basis points off the low to where they are today. Fed’s threatening to take them back down again, but they currently sit, fed funds rate, north of 5%. Dollar strong, rates are higher, and gold has moved up in spite of these factors.

The trading dynamic, which most commodity traders, most currency traders expect to see, ain’t there. So generally traders concern themselves with the inverse relationship, dollar strength, gold weakness. There’s an opportunity, a trading opportunity. Long-term investors, they’re going to see things a little bit differently. They may in fact have this view that there’s a cost associated with owning gold. So, just a few years ago when there was no yield on Treasurys, no yield on bank deposits, there was no problem owning gold, because there was no opportunity cost. Now with a 5% yield, why would you sit in gold when you can sit in Treasurys and earn 5%? So, there’s that opportunity cost which is in play. That’s the argument for why when interest rates go up, gold goes down.

Kevin: Whoops, it’s not working.

David: I mean, we’re sitting here at 5%. Is it, “Oh, it’s the anticipation of lower rates,” or is it— No, just, here we are. Here we are sitting around $2,200 an ounce. No yield?

Frankly, what we do that’s a little bit different in our space, we trade the ratios, gold, silver, platinum, palladium, a variety of different premium and ratio trades, and we can create the equivalent of yield, but that’s a program you can inquire about with our metals company, 53 years old this year. That opportunity cost, again going back to the way most market practitioners think, the opportunity cost creates a theoretical headwind for the gold price and for performance as interest rates increase.

So, just stop and think about that. Reflect on what is different this time. Reflect for a moment on how it is that rates have increased 500 basis points in the U.S., and in U.S. dollar terms gold is reaching all time highs instead of getting chopped off at the knees.

Kevin: So it’s important to understand this time around that some people, central banks, big money, they are identifying gold as real money. What we’ve been talking about so far is currencies. Currencies are not necessarily real money. When they start breaking down, you start to find out they’re not a currency if they can’t hold their value.

David: I mean, it’s one of the reasons why I’m not particularly keen on cryptocurrencies. If you said, “I understand the identity as a speculative vehicle,” okay, then I think I can probably wrap my mind around that. But what are you? Who are you? We’ve long adhered to the identity of gold, the identity of gold, not as a cheap commodity, but as real money, and the role of real money as a form of financial insurance. That is what real money can do for you. You have a reserve which is impregnable, a reserve which is impenetrable, a reserve which cannot be destroyed from public policy measures, fiscal policy measures, monetary policy measures, war. It’s private. It’s portable. I mean, it’s all these things.

It’s why it’s financial market insurance. So, gold is real money. The role of real money as the form of financial market insurance, it is that insurance bid. It is that insurance demand which seems to be implicit to the gold story today. So, regardless of traditional headwinds, there is a far larger issue which we face in the U.S. and globally. Again, these traditional headwinds would be strong dollar, rising rates. There’s more going on here, and there’s enough people within the investment community saying, “We get it. It’s unsustainable.”

Kevin: Do you think debt is what’s catching up to us?

David: Of course.

Kevin: All of my career, people have been talking about how much the government’s in debt. It’s like it’s running behind me, and I’m running away, but it’s catching up.

David: It’s not just a U.S. issue if you’re talking about debt, it’s a global issue. Debt is certainly a part of it, but if you look at the last 10 years, 20 years, 30 years, 40 years, 50 years, you can generally disregard debt as a problem. You can manage it. If something goes wrong, you can renegotiate it. You can move rates lower to accommodate it. Somehow the $82 trillion in government debt, which is up seven times in under 25 years, is now beginning to matter.

So, what matters in the debt markets, and this is, I think, why we were talking about currencies a moment ago, what matters in the debt markets and the stresses which you experience on the basis of fiscal crisis ultimately is reflected in the currency markets. So as we consider gold priced in a variety of currencies, it’s worth assessing how well insured you are against the currency market’s sand pile effect.

You know what I mean? You go to the beach, and you just pile it up, and it keeps on growing and growing, and then all of a sudden to one side, it just sloughs off and breaks. Stability, and then it’s unstable. Building progress, but it proceeds. There you have it, collapse.

Currency vulnerability has never been greater. I think there’s five, six factors that come to mind for me that put currencies at risk. Yes, in the backdrop, to your point, yes, debt is certainly a part of this. The scale of debt obligations, that would be the first major factor. The scale is immense. Corporations have done a better job managing it than governments. Governments have not, and they’ve got rollover risk. They’ve got an inability to keep up with the pace of increased finance costs—that is, interest costs in addition to the new bills that they’re adding. I’ve heard many people say this, “We don’t have a deficit problem. We have a spending problem.” In other words, we wouldn’t have a deficit problem if we would just stop spending.

Kevin: But the central banks have been able to talk that away for so long, Dave. They seem to be losing credibility.

David: Yeah. Well, it’s where our central banks and our politicians operate like the red light district. There are so many favors done both ways. There are so many tricks turned between the Treasury and the Fed and politicians. When you think red light district, you’re thinking K Street all the way to the Capitol, right? I mean, because this is just craziness.

Kevin: It’s corruption.

David: It’s absolute craziness, because it’s, “I’ll do this if you’ll do that,” right? There is an absolute trade in play, a quid pro quo. That’s why we don’t have any fiscal responsibility. It’s why we have a debt problem is because we started with a spending problem. Nobody could say no. What I’m getting at is the scale of debt obligations. It is domestic. It’s global, and it’s the scale which is now—given the environment we’re in, rising rates, rising inflation—not going to work. That is the first and primary pressure point for currencies the world over, currency vulnerability everywhere.

Kevin: Well, and we tasted the threat of that all the way through 2011. Then we saw Mario Draghi come out, and he said, “We will do whatever it takes.” We went through another decade after that, Dave, where the central banks had at least enough credibility that people thought that they had their back.

David: Well, you raised an interesting point because it’s the global financial crisis which increased the stakes for what you could describe as institutional credibility. So, we had a few bad actors. If you look at Fannie and Freddy, if you look at the mortgage-backed securities market, the asset-backed securities market, if you look at how you could fog a mirror and get a loan for a home, and then that paper got spread all over the world, there was an institutional credibility issue. But look, sheriff got back in town. We’ve got Dodd-Frank. We’ve got a whole bunch of other stuff, post-global financial crisis, that has made things better. Except that all you’ve really done is migrate the credibility issue from the periphery of the financial markets to the core of the financial markets, because now you’re talking about government debt.

You’re talking about the issuers of money, and the institutional credibility is tied specifically to the central bank, the Treasury Department, and our three-part system of government.

Kevin: Well, last week, when Jerome Powell says, “Yes, inflation’s rising, and yes, we’re going to lower interest rates,” they’re losing credibility.

David: Right. So, the first issue in terms of currency vulnerability is scale of debt obligations. The second is the degree of reliance on institutional credibility for financial market stability. At the center of this is the central bank community, a variety of treasuries around the world, but you can look at these institutions and say, “They are on credibility watch.” The same way S&P, Moody’s, or Fitch would have a company on credit watch, we are on credibility watch for the world’s treasuries and the world’s central banks. Then again, we’re talking about financial market stability can disappear because of this institutional credibility collapse. The third thing in terms of currency vulnerability— We saw this in the tequila crisis. We saw this in the Asia finance crisis back in the late ’90s.

We saw this with the collapse of Long-Term Capital Management and the Russian default, 1998. The impact of globalization creates interlinkages, and it makes everyone’s business everyone’s business. So, what I’m getting at is there’s no such thing as siloed risk. So, a problem that emerges one place is everyone’s problem, because we’ve created these interlinkages via globalization. So, I can’t just say, “Hey, the Chinese are going to have a rough spot here in terms of their economic growth, meeting their goals, dealing with inflation, most recently this week, an uptick in unemployment.” It’s not just a Chinese issue because of the interlinkages of globalization.

There’s knock-on effects everywhere, but there’s another aspect to that, and this is probably, call it category four for currency vulnerability. We talked about globalization and the interlinkages, the interdependence we share in the global trade and capital markets have been weaponized by a few against the many. And I say by a few because there’s only a few that have the capacity to do it.

Kevin: Right. And we’re one of them.

David: We are one of them. And I read a fascinating paper this week by Georgetown and George Washington University professors titled “Weaponized Interdependence.” Fabulous! I kept thinking, “This is a significant challenge being addressed by other countries through their diversification process, moving away from the US dollar, picking up gold. The US is too central, the US is too dominant. We are a node, we are a central hub for trade and capital and information networking, and we are too dominant for anyone’s comfort, particularly witnessing the weaponization of such a network by what the authors describe as both choke point and panoptic advantages.”

Kevin: So let’s explain the panoptic advantages because the Panopticon was a fictional prison, basically designed to be run by very few to hold many, many prisoners. It was circular, right?

David: Yeah. Oscar Gandy was a guest of ours, if you want to go back and listen to the Commentary from, I don’t know how long ago, but wonderful interview where we talk about information theory and talk about what he describes as the panoptic sort as a way of managing people on the other side of the information flow. And he’s using Jeremy Bentham’s construct of a prison with a centralized guard tower that allows you to see into every cell from one location, and that’s called a Panopticon. So the panoptic advantages that these two authors are describing is that you have the ability to see into—think of the SWIFT system. You have the ability to see into where money is coming and going. That’s the panoptic aspect.

Kevin: And you have a valve that can turn it on and off from various countries.

David: There’s the choke point, right? So the interdependence we share in the global trade and capital markets has been weaponized, and that’s something that creates a tremendous amount of pressure within the currency markets because what was is no longer desired and what will be may end up being different than what we’re used to.

Kevin: Yeah. Do you think that’s what’s causing a lot of the nationalism and this movement of populism where people are starting to say, “No, you’re not going to control me anymore?”

David: I think populism is driven more off of asset price inflation and the growing frustration of the lower classes, unable to make ends meet.

Kevin: The separation of the rich and the poor.

David: If you’ve just minted yourself as a billionaire, going out and buying a Ferrari is no big deal. But you look at the poor middle class and it’s like, “Ferrari, fried rice? Ferrari, fried rice? Well, we’re going to have to skip the chicken.” There’s decisions to downgrade your lifestyle because you can no longer afford it. And that sense of frustration, like, “It’s not working for me anymore,” I think that’s a direct consequence of our monetary policy, which has boosted asset price inflation, which, again, separates the rich and the poor even further from an asset standpoint, but also trickles down to consumer price inflation, putting pressure on folks that don’t have—call it income mobility, income upside. So to me, I would say populism ties more towards strict monetary policy.

Kevin: Well, and just as a reminder, because we’ve talked a while about this, you’re giving points that would lead us to understand why there’s currency volatility.

David: What I’m getting at with nationalism and populism is the tendency towards global conflict when globalization moves in reverse. If you’ve got a global pie and it continues to expand, everybody’s pretty happy with their slice getting larger and larger each year. But if the pie begins to shrink, you still want the same space, which implies that you need a bigger slice to maintain the same square footage. You see what I’m saying?

Kevin: Yeah.

David: So the tendency towards global conflict is there when globalization moves into reverse. That’s where you see nationalism, that’s where you see populism, that’s where you see domestic political imbalance, conflict leading to geopolitical missteps. I think it ties well into our conversation with Neil Howe.

Kevin: Yeah, that’s coming up in a few weeks.

David: Yeah. I think that is a lot of what goes into a fourth turning. And it should be no surprise that currency vulnerability is exacerbated by things like capital controls. Global conflict and deglobalization are not good for currencies.

I think the last thing that stands out to me as pressuring currency vulnerability is policy responsiveness to panic. And you see this where you could do it in 2009, ’10, ’11, different versions of extreme market intervention, QE 1, 2, 3. And so you can resolve the psychological tensions and you can fix the implosion of confidence, but I think we are getting to the point, because of that earlier point I made about institutional credibility migrating to the most important institutions we have from the standpoint of finance and economics— I’m thinking here of the final round of QE. We have any hiccup in the stock market and the next round is the last round. The next round is the last round. This is where you see it show up in major currency pressures. The currency market will signal an intolerance for excess liquidity creation.

Kevin: And the obvious thing that leads to— Because I’m listening to your points and I’m like, “Yeah, you’re right on every one.” The debt, the loss of institutional credibility, the interdependence on global trade, nationalism, populism, we can go right on down, and the fact that they’re going to panic and they’re going to just print money and try to make it work like they did back in 2011. It’s not going to work this time. So Dave, the obvious answer seems to still be gold.

David: It’s the one asset that shines brightest as an insurance asset. I find it equally fascinating that gold is at all-time highs. Think about it, this is really kind of cool. Gold is at all-time highs, and the equity risk premium is at near all-time lows.

Kevin: What is the equity risk premium?

David: That’s the premium that investors expect in stock investments over bonds to justify the extra risk. “I’m going to earn more. I expect to make more.” That’s the equity risk premium.

Kevin: “Because I’m going to risk more.”

David: “Because I’m risking more.” And yet those premiums are the lowest. Only twice in the past hundred years has the premium been lower.

Kevin: So the expectation of how much is going to be earned in the stock market based on where it’s at right now is very, very close to the expectation you would have coming from the bond market.

David: The premiums have shrunk, and we’ve talked about spreads in the bond market. It’s fascinating that the equity risk premium and spreads in the debt markets, everything is compressed.

Kevin: When has that happened before?

David: Twice in terms of the equity risk premium, just before the Great Depression and just before the tech bubble burst in the year 2000.

Kevin: Really?

David: And so think about this. This is what I find so fascinating. Ordinarily, stocks are high, gold is low. The gold market is currently populated with central banks and sophisticated investors that understand where we are at in the market cycle. They understand these are late cycle dynamics which are not likely to end well. That’s the insurance demand for gold.

Kevin: So let’s separate the insurance demand for gold, the people you’re talking about right now that see these things and they’re like, “You know what? We’re just going to hold gold.” That’s different than the short-term speculative trader. If you were a short-term speculative trader, and you said, “Okay, my time horizon is a week or a month or what have you,” you would look at the Commitment of Traders and you’d see who’s buying what. I mean, where are we on the COTs right now?

David: Right. That’s what we talked about last week. Very little change in the COTs as we were comparing last week. And as we look at this week, if you look at it, virtually nothing changed week over week. So the contrarian read would still be the same. We would look at the sources of demand, we would look at who’s involved, the degree to which they’re buying—so the volumes—and what that suggests is a near-term correction in the price.

Kevin: Because you’ve got the speculator heavy into the gold market rate.

David: And the commercial who’s more than happy to be short to protect margins. So post-Powell and his comments last week, there was just sort of a piling into the gold market. It was significant, and some of that enthusiasm was bled off by the end of the week.

Kevin: Buy the rumor, sell the news, right?

David: Yeah. So short-term, the price needs to consolidate. That would make sense, is that we just either grind sideways or drop a hundred bucks, whatever. Again, keep in mind that these are abnormal markets. Gold is behaving incredibly well, with virtually zero risk premium for an equity trader. Gold is behaving incredibly well given that there is no perceived risk in the market if you’re looking at the current pricing in credit default swaps and a variety of other stress measurements. Gold is performing incredibly well in light of a 5% interest rate. Gold is performing incredibly well in light of a dollar that is not in freefall, which you could say would need to be there. We have to be careful because if we count on a correction, it may not come.

Kevin: True.

David: It makes sense that it should be there.

Kevin: But does it affect the longer term targets?

David: No, absolutely not. Year-end targets—and this isn’t long-term at all—but year-end targets, $2350, $2450. I think that’s reasonable. Silver closes the gap to $49.

Kevin: Now that’s big. That’s a big move.

David: Well, it’s a big move, but it’s not a big move because we’re talking about a 50:1 ratio, and a big move would take us to 30—well, 40, to as low as 30. So a 50:1 ratio for silver, totally normal. Take 25—

Kevin: So silver’s a big play right now.

David: I bought silver last week. I bought silver this week. Two weeks ago, I began the process of moving from bars to bags. The bags are getting close enough for the repositioning. Talk to your advisor, see what makes sense. We are all about compounding ounces. Over 53 years, you figure out what works and how to compound ounces, how to grow the size of a position regardless of the current pricing in the market, where you can see, again, the equivalent of creating yield on something that is a non-yielding asset. So that’s what I’m doing with the bag-to-bar trade.

Kevin: So you feel solid on the gold move being up, but you feel solid also on the silver ratio closing, and maybe we get almost $50 silver?

David: If we’re at $2450 by the end of the year, I think silver’s closing the gap through the mid-forties, closing on the old high, $49 an ounce. Now, when I say 50, I’m talking about the ratio, 50:1. One ounce of gold equals 50 ounces of silver. We’re currently at 87, so that’s a significant outperformance. Both can move the right direction. Silver outperforms.

And what is your strategy? How do you take advantage of that? Do you become a silver bug? The answer is not only no, but hell no. You remain agnostic as an investor, and appreciate what it means to buy value—always looking at the discount and getting rid of the premium. That is what I’m talking about. That is what we guide clients through in that kind of an exchange.

Kevin: Well, it reminds me of a phrase. Whether this is appropriate or not, I don’t know. But gold is like the long-term spouse that you can count on. Silver is the blonde in the red convertible. And so oftentimes silver will shock you both directions, a little bit more dangerous. But if you understand how the ratio is—

David: I’m going to change that and say that gold is the long-term spouse. Silver is the weekend getaway with that same spouse.

Kevin: I’ll let you do that.

David: Okay.

Kevin: And notice I said spouse. Okay, so I’m going to stay out of trouble this way.

David: Okay. Maybe when I’m your age, I have to just— I didn’t hear that.

So yeah, silver plays catch up. That’s how it works. I recall the 2020 underperformance of silver. It was single digit, kind of stuck in the mud. Gold was in the mid-teens in terms of positive performance by the year. But by year-end, silver had moved twice as far as gold, close to 50% up, where gold was up 25% for the year. And it was like the caboose coming around the corner at last. And in that case, it actually moved even farther in terms of performance.

Kevin: It moved way down and then it moved way up.

David: Yeah.

Kevin: Yeah.

David: I’m using Vaulted more aggressively than ever, our Vaulted program at the app store. It’s cheap and—

Kevin: That’s for [partial or full purchases of] thousand-ounce bars.

David: Correct.

Kevin: Yeah.

David: So aggressively positioning in thousand ounce bars while taking my other depository holdings, which are already in bars, and I’m doing something different with them. I’m moving out of the bars and into the bags.

Kevin: And bags are 90% silver. That’s the pre-1965 silver, dimes, quarters, 50-cent pieces.

David: That’s right. No 40%—which there is, 40%, out there. 90%. And we’re trying to get that as close to spot as possible.

Kevin: Right. Yeah. Don’t just go out and do that.

David: No, no, no.

Kevin: You need to make sure the math works.

David: That’s right. Make sure the math works. I’ll lose a few ounces on the way to bags, but will more than gain them back exiting the bags down the road. I’ve picked up a lot of free silver on that trade over the last 10 years.

Kevin: Yeah. So Dave, I know I say this often, but I’ve got almost four decades with this family firm. I was talking to you last night, and we were talking about, “Well, what’s the competition?” There are a lot of gold and silver brokers out there. I can’t think of anybody— Once people start to get to know us and understand, like what you just now explained. Who knows how to do that except for people who’ve done it for decades?

David: Well, what happens is most of our competitors, they bury their clients so deep in fees that there is nothing that can be done of a productive nature.

Kevin: They overcharge on the commission right off the bat.

David: Yeah. Front end fleecing, it’s like bad decisions limit future options. Who you work with matters. Because if you made a bad decision on the front end, you don’t have any other options.

Kevin: It destroys the long-term relationship. And the only thing this company has always been about is legacy, long-term relationship.

David: Yeah. While we have competitors, we really don’t have competition. Our competitors are not legacy-minded. They’re not liberty-minded. They’re not strategic. They’re not tactical. They are generally one-trick ponies that have not been through cycle after cycle. Try 53 years, you’ve seen a few things. All they can offer is overpriced goods and over-promised hype.

Kevin: And this isn’t everybody we’re talking about, but it makes up the guys who are spending millions on advertising on the big name shows.

David: I was listening to Glenn Beck on the way to work. For sanity’s sake, I swap back and forth between NPR and programs like his. I mean, I need sanity from him. I also need sanity from NPR. I mean, there’s—

Kevin: You balance things out—

David: Oh, yeah.

Kevin: —and then you make your decision.

David: Truth is somewhere in the middle. Maybe not quite the middle, but close enough.

Kevin: Yeah. You’re giving NPR an awful lot of credit, but I understand.

David: Yeah, I know. So, he shifted gold companies.

Kevin: Again.

David: After an all-too-predictable implosion of the last one, scandal, embarrassment. And it’s really interesting. His model is broken. I don’t know why he doesn’t put more scrutiny to this. It’s hard to believe that every company he has endorsed—Goldline, Merit, now Lear—he’s endorsed and they’ve subsequently been charged with fraud, elder abuse, some other radical charge, and they’ve gone broke or shrunk from big company to little company and been hiding under a rock because they’re tired of getting hammered by attorney generals all across the country.

Kevin: Yeah. But they have to pay for the celebrity endorsement, Dave.

David: That’s right. That’s the model is you pay through the nose for a celebrity endorsement, make it up by charging exorbitant fees.

Kevin: You’re paying advertising money when you buy gold from one of those firms.

David: He’s not working with good people. Now, he’s got new ones. This is amazing to me. I mean, this is just on my mind because I just heard it this morning. “Rush used the people. I use the people.” And I’m thinking, “Wait a minute, do you realize that last year, the company that you’ve just signed on with reorganized following a 2022 bankruptcy to resolve future investor lawsuits?” They had already been forced to settle $8.75 million in claims, attorney generals across the country going after them for deceptive business practices, violating investor protection laws. That’s how the Los Angeles Attorney’s Office characterized it. So, competitors, yeah. Competition, no.

Kevin: No. We’ve been around what? This is our 53rd year.

David: We’re playing a long game of client service, strategy implementation. It can’t be matched. In 53 years, we’ve seen dozens of companies come and go. We’ve seen hundreds of thousands of investors left worse for the wear, having worked with our competitors. And I’m telling you, this is a really critical moment. This is one of the most dynamic moments in precious metals history.

Kevin: Yeah. Our clients need to have metals. They just don’t need to be ripped off.

David: The importance of your decisions can’t be overstated. But if you fail to engage with ethical companies, you will lose. Just last week I was presented with a multipage agreement required by two separate competitors of ours. You sign the agreement before you do a transaction with them, and you’re basically signing away your rights to pursue them legally. The client had to sign the agreement before a trade was locked in. Of course, it indemnified the company and the broker. That’s considered normal?

All that is, is declaring what is about to happen to you. This is indemnified theft. I have this on my desktop. The stated—the claimed—commission was 34.99%. The actual cost over spot for nothing more than a bullion product, 79% to 80%. Here’s the bright side. They’re going to give you some free silver in the package. $500 of silver. You want $5,000 free silver. Free silver, I mean, I just wonder, is the general public that full of suckers?

Kevin: Well, here’s the sad thing, Dave. I like Glenn Beck. My wife listens to Glenn Beck. There’s oftentimes I’ll turn over there and I’ll go, “I really like what he’s saying. I’m on your page.” But he has to pay for the program. And so, what pays for the program are these ridiculous commissions.

David: Is the scalps of conservatives. The scalps of conservatives. It’s not tolerable. And I frankly think the Department of Labor should go after these companies and nail them to a cross.

Kevin: Yeah. If the Department of Labor was not just as fraudulent as everybody else, but yeah.

David: I’ve sent letters.

Kevin: Yeah, I know. I know.

David: I have pleaded with the Department of Labor to do something about the reckless nature of what’s happening inside IRAs and retirement accounts.

Kevin: We’re the government. We’re here to help.

David: The IRA gold specialist companies are the ones who are fleecing people in that category, 50%, 60%, 70%, 80% commissions. It’s killing them.

Kevin: So, let’s go back to what we were talking about last night, because I think this ties in. Let’s go to a positive. Okay? We read The Fourth Turning years ago. It was written in 1997, Strauss and Howe. Strauss has since passed away, but Howe has continued to write and talk and do interviews. How many times has he been on the show? Probably three? Three times?

David: Three or four. Yeah.

Kevin: Yeah. And then he’s coming on here in a few weeks, and he’s written a new book called The Fourth Turning is Here. And it’s a very good book. Even for those who’ve read The Fourth Turning, it’s an excellent book, but it got us talking about generations, Dave. Let’s go back to legacy for a moment instead of competition or gold brokers, most of these guys haven’t been around for that long.

David: Well, they don’t care about what kind of— I mean, they’re creating a legacy. They just don’t care what kind they’re creating.

Kevin: And I don’t know that they have long-term clients because I get a chance to talk to the people who’ve been fleeced, and they’re like, “Yeah, we bought once and they don’t ever want to talk to us again.”

David: But in Howe’s book, he talks about generations being the foundation piece for why there’s cyclicality, why there are these sort of spring, summer, fall, winter. The winter season, that fourth turning is the dark. How do we get there? And why is it so—

Kevin: Right before the dawn. Yeah.

David: It’s because you’re dealing with the interactions of generations. And there is a pattern to how one generation who experiences A, B, and C, X, Y, and Z, their life is shaped by those experiences. And from their life experiences, they teach, and they tutor, and they raise their children in a certain way. And those children behave differently, and teach their children something completely different.

Kevin: So, let’s go back to that. Let’s go back to that, because I was talking about my family, okay? My family didn’t start a gold company, but my grandmother and my grandfather had tremendous impact on me. Well, both sets of grandparents, but they lived through the depression. That would be considered a fourth turning. And they lived through World War II, and then of course we had the first turning restart that came in the ’50s, and you go through that cycle pattern.

Whether that cycle pattern is always exactly accurate, it’s been a great reflection of the last 700, 800, 900 years that Strauss and Howe analyzed back in 1997 in their book. But here’s the thing I said, what generation has had the most profound impact, usually, on a family if you really looked back? At least in our family, it’s the generation that went through the depression.

Everybody says, “Well, what would Nana say?” Well, let’s think about your family for a moment. Your dad and mom started this company back in 1972, and they were born right after the depression, but his parents were depression, they remember the depression, and his grandparents. Do you remember that?

David: I think the fourth turning, I mean, if you wanted to simplify it even further and say—from one family to the next, from one experience to the next, maybe this is a little more idiosyncratic, and there’s some general themes that may end up being sort of “generational.” But I think about my great-grandfather, I think about your nana and grandpa, and they had greater impact on future generations because they experienced something difficult. They were able to distill the essence of things better.

Kevin: Well, tell the story about your grandmother and the tinfoil.

David: Well, I would spend 10 days with her. I’d go down to Phoenix and spend a week to 10 days with her in high school and then through college. And in the top right-hand drawer, just to the right of the stove top was all of the Saran Wrap and tinfoil, which had been reused a dozen times. You used it once and you were going to use it until it fell apart.

I remember thinking, “Where did she get that?” Well, I don’t remember if she was born in ’07 or ’08—1907, 1908. She was in the Pavley-Oukrainsky Dance Company, one of the earliest American dance companies. Just an absolutely fascinating woman. You look back and think, “Well, what were the things that were most impactful to her, which then were most impactful to the next generation?” And actually, I could say it’s the pain.

Kevin: The pain?

David: Yeah, because her great-grandfather grew up in the Midwest. His house was destroyed. Just imagine you’re Wizard of Oz. Wizard of Oz, storm comes through and you go into the storm shelter, and you come up and the town is gone. And if you were not in the storm shelters, you were gone.

Kevin: Is this the man, though? Okay. So, we were together.

David: This is my great-grandfather who would never buy a home, who only ever lived on the first floor in hotels his entire life because of that experience. And if he had to be on the second floor, he had a rope in his suitcase so that he could lower himself from the second story window. His fear translated into a certain sort of action.

Kevin: And you’re generations removed from that, and you still remember that. It still has impact on your family. It still has impact on your father. It probably had impact on your grandfather. This is a great-grandfather we’re talking about. I was with you-

David: Great-grandfather.

Kevin: Okay. So, I was with you when we were staying with your dad’s sister, Joan, and it was just a really beautiful moment because we were down there for a conference and she said, “Stay with me.” This is Don McAlvany’s sister. And she got something out, Dave, that just for me, I was so honored.

David: It had never been opened. It was a steel pipe with locked ends on either end.

Kevin: She got it out when I was there with you, and she opened it up.

David: This was a gift from her grandfather.

Kevin: The silver dollars were wrapped in old newspaper that he—

David: Slid inside and stacked inside this steel pipe.

Kevin: I got this picture of your family. It was like, “Oh, well, no wonder Don McAlvany started a precious metals firm.” He may not have even known it was in his genes.

David: My great-grandfather, so my aunt’s grandfather, has this silver from the days of William Jennings Bryan, and he was in that conversation. He was in that era where you’re dealing with the difference between gold versus silver, bimetallism, the arguments. He marches through the Great Depression, and he wants to leave something in a time capsule for his granddaughter.

Kevin: And this is when the dollar was still backed by gold. He knew something. Yeah.

David: And so, he fills it. He fills it with silver dollars. It’s about three feet long.

Kevin: That’s incredible.

David: That’s beautiful.

Kevin: Yeah. And so, where I’m going with this is this. We were talking about other companies that come and go. They file Chapter 11, they overcharge, they act— It’s like the narrative that we see with the central banks. The story. They can tell whatever story they want, but there is a real history. And history is different than the story. History is fact.

So, Dave, wrapping this up, I think one of the key things that you said today is that gold is breaking out and the currencies are breaking down. And what’s showing us that isn’t just that gold is hitting all time highs against all the other currencies, but as the dollar is rising relative to those currencies, it’s still falling relative to gold. It’s still falling relative to the buying power of the dollar being able to just go buy bread, milk, that type of thing. And Jerome Powell and the Federal Reserve and the central banks have basically— What was Morgan’s word for that?

David: Dismissive.

*     *     *

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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