Podcast: Play in new window
- Bitcoin Behaving As A Stock Market Mirror & Not A Hedge
- Are Annuities Becoming The Bag Holders?
- Watch The Webinar – The Next Regime Playbook
“Silver is a different animal. No central bank buying eats it up. Investor demand in competition with increasing industrial demand—those are the two most critical elements, and you’re dealing with now a five-year supply deficit, five years in a row, supply deficit. It’s a very worthy investment or speculation, even just looking at the supply dynamics. But again, if you’ve got motivation from a demand standpoint, an investor looking to hedge against inflation, what have you. What we tend to see in a rising metals environment is that silver remains price accessible far longer than gold.” – David
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Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany.
David, the call last week was just great with the guys, and that’s still available for our listeners.
David: Yeah, if you missed last week’s Next Regime Playbook, the webinar, there’s a link for you in the show notes, and the presentation is just over an hour—60 to 90 minutes, including some of the early questions. Interestingly, I’ve never seen more questions in queue.
Kevin: What was it? Over 60?
David: Yeah, you don’t have to sit through the entire Q&A, but I think you’d find plenty of value in doing so if you could carve the time out. We had between 60 and 65 questions. That’s just amazing engagement with the ideas and the market insights we shared. I’d say just don’t miss it.
Kevin: We were talking last night, Dave, how technology, instead of being a tool, can actually be our god—little g, god—and without us even knowing it. And you’re talking about engaging questions. Using technology for people to actually interact personally is the right way to use technology instead of AI telling you what to think and just cumulatively figuring out what the best answer is. It’s better to engage and sometimes to disagree.
David: Yeah, a tool towards a particular end, and meeting as we do on Monday evenings, you brought up Heidegger’s essay, “The Question Concerning Technology.”
Kevin: That’s a dense essay.
David: It is, and I admit, Continental philosophy was always Mary-Catherine’s domain.
Kevin: That’s why you married her. For many reasons.
David: The essay did reach back to the ancients. So Heidegger was drawing on Plato and Aristotle, which was always a relief to me, is always a relief to me. All the same, reading Heidegger is like rolling a tight, entangled ball of string around in my hands. You see the complications on the surface, the touching points and the relationships, and know it’s ever more convoluted the farther in you go.
So patience required. It’s complicated, but it was a worthwhile effort. What I appreciated most about the essay was the experience of pushing out the boundaries of my thinking on technology. Sometimes particular conclusions are less important than a broadening of perspective and expanding of intellectual range resulting from a rigorous mental exercise. I woke up this morning and I was thinking differently about everything—and not directly tied, but indirectly related, to the essay.
Kevin: One of the things that I liked about the essay, I mean, it’s 14 pages of very, very dense thinking. That’s why after a Talisker— I do need to go back and reread it the next morning. But what I liked about it was he’s not pro or against technology. In fact, he says that it can rule you either way. What you need to do is actually ask yourself what is the essence of the thing? What is the meaning? What’s the larger picture? And I know you try to do that with the markets, Dave, so let’s move to the markets. What is the meaning right now of what’s going on?
David: Well, no less complicated, but at least more approachable. We’ve got an economy that’s running at 4.1% growth rates. That’s the November 17th reading of the Atlanta GDPNow model. And you’ve got financial markets which remain amply supplied with liquidity. So there’s been, certainly up through the beginning of last week, a lot of enthusiasm. The question is, do liquidity dynamics shift, and do we see asset performance shift lower, even while we have healthy economic statistics?
Many aspects of this ball of string are easy to see. Some complications and knots are closer to the middle and you can’t see them immediately. Appreciated only if you’re willing to unravel it a bit further. So under the surface, there’s a lot going on. In the last 10 days, a number of problems have emerged.
Kevin: It’s funny, I have to think about why you’re talking about a ball of string all knotted up. I had to make a decision this weekend because I hung Christmas lights, and we have those lights that have the icicle strands that hang down. I was up on the top of the ladder and I had a tangled mess, and I stayed on the top of the ladder for quite a while thinking, “If I just shake this thing out long enough, it’s going to happen”. And then I realized, I don’t know how many people die trying to do that every year, hang their Christmas lights and try to get them untangled from the top of the ladder. But I finally came down and I untangled it. Fortunately for me, I’m still alive and the lights work.
But let’s go back to tangling and untangling. The tangle that we have right now is because we’ve had such freedom in money. I mean, it’s just been loose policy for year after year after year. That’s why there’s liquidity. But right now, the repo market is starting to show some signs that people want more interest.
David: And you’ve got leadership at your top banks getting together to say, “We’re probably going to have to address this”. And so it’s more than a passing concern. Again, untangling takes time, energy. I think probably one of the greatest areas of soul growth for me over the last 15 years is going fly fishing, because you do get tangled.
Kevin: You can get tangled, yeah.
David: And if you operate too quickly, if you’re trying to resolve the issue at speed, it just gets worse. You have to slow down, you have to take your time.
Kevin: Well, and you said banks are meeting. I’m going to go back to the banks. Not only are the banks meeting, but private credit is a real issue right now, too, isn’t it?
David: For sure. I think this week I hear a growing number of concerned voices in the private credit space. Makes me think that, again, some knots are better cut than untied. There are moments when you’re fly fishing where—
Kevin: Just cut it off.
David: Let it go, start over.
Kevin: Lose the fly.
David: Yeah, yeah. Jeffrey Gundlach joins the choir. He was in a Bloomberg interview saying, “The trouble always comes in financial markets when people buy something that they think is safe; it’s sold to them as safe, but it’s not. The industry’s push into retail investors has created the perfect mismatch between a promise of liquidity that’s backed by illiquid assets”. So, making matters worse, you’ve got ratings shopping, which has allowed for a lot of private credit instruments to get an apparent upgrade.
There’s competition for the business, the revenue generated. And so these ratings agencies, usually second tier agencies, it’s been intense.
Kevin: They say, “Oh, it’ll be fine. This is a good asset”, when really you can’t sell it.
David: Give it an A rating when probably it’s not. Give it a B rating when it’s clearly not. So it’s not unlike what we saw during the buildup to the mortgage crisis in 2008 and 2009 with a number of those top-tier rating agencies giving a triple A stamp of approval on stuff that was a flaming bag of dog poop.
Kevin: Chop it up and re-bag it basically is what they did. Yeah.
David: Well, in this current context, the recommendation from Gundlach, lots of cash. He’s up to 20% of an allocation across portfolios. More than a little gold. He revised it from 25% to 15, but this is coming from a bond trader, which I think is the most—
Kevin: They don’t buy gold normally.
David: —interesting bit. Yeah, exactly. As for private credit, we agree with Jeffrey, stay away. It’s a $1.7 trillion asset class of low quality, illiquid assets, and it’s now being offloaded to the public with dubious ratings, acting like a bathroom air freshener.
Kevin: So what you’re basically saying is if someone’s offering you twice as much interest as say the US Treasury, you’d better watch out because that might be part of that private credit that’s being sold.
David: Yeah, you’re taking more than twice the risk.
Kevin: So let’s go to private equity, which is a little bit different than being paid interest. This is actually assets, supposedly, that are salable, that you can liquidate, but that’s not necessarily true, is it?
David: No. The game is to buy a company, take it private, slice and dice, add a bunch of debt to the balance sheet, and then hopefully take your original money out and make a bunch of money on the pieces that you sell off. You’ve got, I think the number was 27,000 unsold companies, so they were supposed to be sold, and they’re past their date. I mean, you buy them and sell them, and you do all this within a three to five year time frame, private equity.
Kevin: And they’ve been sliced and diced and broken up into smaller units.
David: And they’re not selling, in part because interest rates have moved higher and the math doesn’t work anymore. When you lever up a balance sheet and then interest rates move higher on you, you’re in a bit of a pickle. So I mean, as you recall, this is the stuff we’ve inveighed against going into insurance portfolios. For us, the insurance portfolio today is a financial version of a mass grave.
Kevin: Wow.
David: Quick recap. Private equity is sitting on those tens of thousands of unsaleable companies, even though you have merger and acquisition activity picking up a lot, and IPO activity, it’s really heating up. They still can’t move the companies, which is telling. To resolve this, they extend and pretend. They’ve got credit services which are provided through private lenders. Basically private equity launches a new shingle and says, “We’re also private credit”, and they arrange for the financing.
Kevin: So it’s almost, it’s a circle, and basically they’re financing themselves in a way, and it’s just bad debt.
David: Yeah, and it allows for the limited partners and the GPs of the private equity companies to get some of their money back. But they’re, again, we’re talking about low quality, illiquid paper that’s being stuffed into unsuspecting portfolios. Not all of it lands in insurance portfolios, but the private equity guys have been buying insurance companies with the benefit of capturing long-term invested assets. That gives them the allowance to stuff the private credit into those portfolios.
Kevin: Well, and we talked about this four or five years ago. When we were at zero interest rates, we were like, how are these insurance companies going to continue to make their minimum interest payments?
David: They take more risk.
Kevin: Yeah, they’re behind the curve. And I talked to a client yesterday who’s moving money over into a single IRA, but she had a broker who put her into seven different annuities in an IRA. So there’s a point where you go, all right— I mean, we’ve done annuities even here at McAlvany’s in the past when it was appropriate, but right now you’re saying there may be a danger.
David: Yeah, this would be an excellent time to avoid buying annuities where private equity groups have turned policyholders into bag holders of credit instruments that no one else in the financial market will touch with a 10-foot pole. The hope, of course, is that when and if credit concerns arise, there’s so much portfolio opacity with those insurance assets that your odds of a deposit run, like you could have at a bank, you won’t have a panic because nobody knows what’s in there anyways.
Kevin: Right.
David: So looking at your publicly traded private equity companies, the performance at Blackstone, at KKR, at Blue Owl, they’re down 20% to 24% year-to-date. That’s notably contrasted with the KBW Bank Index and your broker dealers, other expressions of financial service providers, which are up 14% to 17% year-to-date in line with the S&P.
Kevin: Right.
David: So banks are hanging in there, year-to-date. Shadow banks, not so much. So, like I said, the complicated parts are inside the ball of string.
Kevin: Well, and it’s the stuff you can’t see. I mean even using that analogy, I’m glad you brought it back, you cannot tell where the tangles are oftentimes.
Let’s talk about last week, though, because it was interesting. It had a spectacular start with some of these assets, like crypto and the tech stocks that are leading the NASDAQ, but it didn’t finish well.
David: No, and it may well have been the public market’s inflection point. I would say it was important on two fronts; you’re right, how it started: spectacular results earlier in the week, risk embracement, stellar performance early on. That’s sort of part one, only to be met with mass liquidation later in the week, which is part two. We’re also getting the 13F reports from hedge funds, which are showing that they’re hitting the exits on a lot of their technology shares.
Kevin: Do you think that has something to do with expectations for interest rate cuts or not? Do you think that’s going to play into it?
David: I think that’s becoming a reality.
Kevin: Yeah.
David: So we’ve got minor developments with major implications, and, yeah, the shifting view of interest rates doesn’t seem like much, right? The probability of a 25 basis point cut in December—except that last week it sunk below 50%. So, odds are increasing that there is no cut, and yet that’s what the market has been counting on. So expectations are built in. Now you’re seeing something of a disappointment or reversal of expectations.
Kevin: Well, see, that’s that tension that the Fed has all the time. Do you address inflation or do you address the markets? And right now, inflation, you said it dropped below 50%. So there is a concern that inflation is not going away.
David: Right. So the pressure is on the Fed. Maybe they should not be lowering rates. What to prioritize from a monetary policy perspective, jobs or inflation? When you’re stuck between these two mandates, they’re not always consistent, and your policy choices, you might have to look at the trade-offs and choose one or the other.
Kevin: Well, and these Fed guys have to be careful what they say because they can really upset the market.
David: Yeah. Bostic announced his retirement from the Atlanta Fed in February, towards the end of February, and following that announcement was unusually candid. I think he’s now got nothing to lose. That’s what I would guess. He said that forward-looking indicators suggest inflation is unlikely to decline substantially for some time. That raises concern that inflation expectations could drift upward and trigger behaviors which produce higher actual inflation. The main contributors to elevated inflation are now services prices, other than housing, super core services, and core goods prices.
So, Kevin, our takeaway: another cut is becoming less likely. And the markets were counting on it, they were counting on it. That is a trigger for equity market volatility. That is a trigger for risk off.
Kevin: Okay. But I wonder, too, because the Fed in the past has reacted to the markets and just thrown inflation out the window, and with these markets as high as they are, what did you say this morning? They’re three standard deviations— I mean, they’re as high as they’ve ever been. What is the third standard deviation? What does that say?
David: Yeah, if you’re looking at a Gaussian curve, three standard deviations accounts for 99.95% of the data. In this case, we’re talking about the time that we’ve had publicly traded markets.
Kevin: Right. Wow.
David: So, there’s 0.05% of all U.S. stock market history where prices have been higher, valuations have been higher.
Kevin: So, you’re in that 0.00 something?
David: Exactly.
Kevin: But it takes a lot of liquidity to keep that thing going. And with the liquidity, it maybe could?
David: Well, and this is where cracks in the private credit market and what we’re seeing in repo are even more significant because these are your first indicators that something is shifting within the credit markets. While we’ve had ample liquidity, and while last week started impressively, it also ended impressively—just in a very dour tone. So, an overvalued market requires over-the-top amounts of liquidity to keep the trend in play. Even a minor curtailment in liquidity, or in this case less cuts, less interest rate cuts, that sets the leveraged speculative liquidity-dependent trader on edge.
Kevin: And what we’ve seen with especially AI stocks is that that liquidity has been necessary. I mean, you’ve got some big guys right now cutting back on NVIDIA.
David: Yeah, AI, tech more generally, the financials, crypto, were all under acute pressure last week. That continues this week. SoftBank exited 100% of their NVIDIA position, it was 5.6, 5.8 billion, I forget which. Peter Thiel, his hedge fund, they’re exiting NVIDIA as well. Notably, these multi-billion dollar holdings sold before Wednesday’s NVIDIA earnings report. So, I wonder why.
Kevin: I wonder what they know.
David: And it may be that we’ve pressed as much as we can to the upside, $5 trillion market cap for NVIDIA. Is the bloom off the rose in terms of AI? Time will tell.
Kevin: Well, let me ask, on that bloom, okay? Sometimes you’ve got a full rose bush, okay? Where you’ve got roses everywhere. Today we just have a one concentrated rose, right? I mean these markets, these seven stocks, have pretty much dominated the market. What? 25%, 30% of the moves have had to do with that—or the capitalization.
David: Yeah. If you look at the percentage gains in the S&P, I think 40% of the gains are attributable to those seven names.
Kevin: So, it could be a concentrated downturn if that rose gets clipped.
David: That’s right. And now you’ve got Wall Street pundits scrambling to sort of re-frame and support the narrative, they’re working overtime to convince investors that they’re still early in the AI trade. I was listening to a Bloomberg interview, a guy from Northern Trust, an analyst from Northern Trust, making the case that AI is very under-invested.
Kevin: Huh. Wow.
David: Really?
Kevin: Even though they’re not making any profit right now?
David: Right. Right.
Kevin: It’s under-invested.
David: And NVIDIA is making plenty of profits, but at a $5 trillion market cap, I would suggest that’s a crowded trade, not an under-invested name. But it’s good to know, Northern Trust thinks we’re still early in the adoption cycle for AI. And to be clear, AI has so much future ahead of it. What’s not as clear, if we’re investing too much in capacity today that it’ll take a long, long time to fill.
Kevin: Do you think that’s happening with crypto too? Because crypto is coming down at the same time, which you had a good point this morning in our meeting, Dave, a lot of people treated crypto as a hedge, almost like gold, a form of gold that’s just based on a number. But actually, crypto’s behavior has been very much in correlation with the speculative side of the stock market.
David: Yeah, just with more beta in either direction. So it’ll outperform in the upside. If the S&P is doing well, it does even better. If the S&P is doing poorly, it does even worse. Bitcoin has quickly flipped from bullish and positive year-to-date numbers to bearish. And your smaller cryptocurrencies have exaggerated those losses relative to bitcoin. So we are down 2%, 2.5% year-to-date with bitcoin now, but that’s off 27% from its October 5th peak. You contrast that with a 56% year-to-date gain in gold, and yes, it looks like crypto needs a bullish equity narrative to grow. It is a risk asset. It’s not a hedge asset. It’s not a substitute for gold or silver. You can own it if you want, but just know what you own. And I think, even more important, be honest about why you own it.
Kevin: Right.
David: So-
Kevin: Well, we talked about that. We talked about the essence of a thing, talking about technology. Know the essence of something. If you ask the question, we’ve talked about this before, ask the question, would you own crypto if you knew it wasn’t going to go up? Is there another reason to own it?
David: And some people have answered that question with crypto the way that Heidegger addresses the issue in his essay, what is the purpose? What is the telos? Is there something that is being served through this technological innovation? And it was diversification, it was decentralization. It actually seems fairly correlated to risk assets. Relative to the S&P, that correlation’s picked up considerably over the last five years, just more volatile in either direction. And I think the decentralization theme, I think that narrative has already played out.
Kevin: So, don’t mistake it as a hedge, and don’t mistake it as private.
David: No, definitely not.
Kevin: Great. Well, and again, to be clear, when we’re talking about AI and we’re talking about the prospects for the price of AI, you’re not saying that it doesn’t have a future. What you’re saying is it may be very, very expensive right now based on what we’re getting out of it.
David: Right. And in past cycles of growth and development, we’ve seen over-investment was something that ultimately was radically transformative. When we put in rails across the United States, there was a boom in rail shares, but there was also excess and what, in retrospect, you could describe as a bubble. But you didn’t know that you were over-building until people started to say, “Well, what’s the rate of return on my investment?” And in that moment, it was clear that it was going to be low to negative because you had built overcapacity. Now, we spent the next 50 to 70 years filling that capacity, and the investment ultimately was very transformative, but that did not prevent investors from being wiped out in the first phase. The bubble turned to a bust, and then post-bust—then you had a rebuilding. So—
Kevin: And you have sort of an ecstatic gain at first, and then you have a bust, and then you have the steady gain on whether it’s practical or not.
David: Yep. So, narrative is what we harped on last week, and the bullish AI narrative is what seems to now be unraveling. So financing the infrastructure build-out, providing as we suggested last week. You’ve got the real world obstructions to progress, which are all in the physical world. This is the power that’s necessary for the data centers. It’s the energy creation. These are fundamental factors in the physical world which do not support the adoption cycle, the time frames, the expectations for a positive return for an investor, and I think that’s where you’ve got investors way too far out over the ends of their skis.
Kevin: You know what it reminds me of? The other night I was getting my telescope and a couple of other things out that I haven’t had out in years, and it requires a lot of battery power. Well, we didn’t have enough AAs, so I had all this capacity. I mean, I had Saturn out there. I was just waiting to go and I didn’t have enough AA power. So it’s interesting how the physical world sometimes can intrude that way. But last week, Philip talked about the energy sector. We’re talking about, that’s a little bit like having batteries. And that’s an undervalued sector right now, isn’t it?
David: Yeah, it’s a better long-term bet, in our view, the energy aspect. So a bet on natural gas, yes. A bet on pipelines to some degree.
Kevin: AA batteries.
David: Yeah, oil. We would include oil, although we’re slow in putting those trades in place. I think there’s plenty of time for that to develop. There are some spillover benefits from AI, but the energy trade is more fundamentally based in the under-investment of the past decade. Demographic pressures on a global basis impacting the demand side. And if you want to look at the supply dynamics, I would say go to Philip’s section in last week’s presentation, “The New Regime Playbook.”
Kevin: Yeah. We’re going to connect that to the show notes again this week.
David: Yep, exactly. Not everyone agrees on the energy market supply and demand dynamics, but he makes a compelling case. We’re in the midst of a rollover in shale, and that is the marginal source of increase in global supply, which with a clear view on where demand is coming from, that’s really the sticking spot is we’re either oversupplied or they’re overestimating what is coming online from shale. And in fact, if we’re losing production over the next six to 12 months, then you’ve got a price opportunity.
Kevin: Well, and let’s say we did have the energy, let’s say we had all the energy we needed available. We don’t have the grid to run that energy at this point, do we?
David: No. That’s true. The grid doesn’t support what we need for bandwidth, if you will, or the data centers, which put a lot of pressure on energy supply.
Kevin: So China, though, okay, do they have the same constraints that we do?
David: No, and a part of that is they don’t have the limitations we do from the standpoint of EPA approvals and permitting. Their cycle of getting things online is very quick. We saw that in COVID with the building of hospitals. What they could do in 30 days would take us 30 months. And so there is a constraint that we face that they do not face. They’ve also got other factors like an ample workforce, some of which are paid, some of which are not paid—not paid adequately. Slave labor is an amazing thing when it comes down to it. Not an advocate, just saying.
Kevin: Ammunition, the Russians or the Chinese. They can make ammunition like mad.
David: Well, but what we saw last week, interesting comments from Patrick Pouyanné, he’s the CEO of TotalEnergies—Total. He was sharing at the COP30, the climate summit, “I think it’s worth restating that there is a realistic scenario where global oil and gas demand continues to rise for the next 25 years.”
Kevin: Wow.
David: The assumption has been, actually because of electrification, because of a move towards renewables, that we were within a few years of peak demand for oil. What he’s saying and what he’s re-framing is that actually there’s a good case to be made that, that’s two and a half decades out. That was not a welcome message at the COP30 summit, where the hope is the complete abandonment of fossil fuels.
Kevin: Yeah. So not only the electrification of AI, there’s a commonality right now, what we’re talking about and how it ties to energy. We do get grid upgrades. Let’s assume we get the grid upgrades. We’re going to need not only coal and oil, but nuclear. I mean, they’re going to be reaching in places that they haven’t really been reaching up to this point.
David: Yeah. And I think that’s where there’s a commonality. If you’re looking at electrification and the goals of the COP30 summit and AI, the commonality is this desperate need for grid upgrades and an increase in energy supplies. When we think about energy, when we think about consistent delivery of kilowatts, where are we going to get it? It is gas. It is nuclear. It is oil to the extent that a transition towards electrification is decades, not years away. So to one degree or another, those spaces have been under-allocated to by the investment community, under-owned for the past decade. The growth constraints to AI, they’re all physical world problems.
Kevin: That’s the whole idea behind hard assets. The whole hard asset thesis is that the world really does exist. There are constraints, and if you invest in the things that are going to be scarce, it’ll pay.
David: Yeah. And this is where a few years ago when the green energy revolution was front-of-mind for everybody and electrification was the inevitability—this is before the AI narrative. We had the green energy revolution narrative. The question we were asking is, so how much copper do we actually need for that to take place? And one view is that we had to have five times current production from copper mines to meet electrification goals on the time frames laid out. There’s no ability to do that.
When you start looking at how those mines, particularly the ones in Chile, have been managed—or state-owned mines mismanaged. You can’t increase productivity at those mines by more than 5%, 10%, 15% in a great year, let alone 500% in a short period of time. So we looked at it and we thought, “This is political. This has nothing to do with what is actually achievable.” The constraints are in the physical world, and the limiting factor is the current supplies of a product that they have to have to make it happen.
Kevin: So this sounds very obvious, and you probably didn’t have to go to the Grant’s Conference to hear this, but you basically sell what’s abundant and you buy what’s scarce. Right now, in the markets, Dave, what would you consider abundant? What is abundant?
David: At the October Grant’s Conference, that was one of the themes by one of the speakers: sell assets that are in abundant supply—and he was basically making the case against government bonds—and buy what is scarce. And he could have been on our new regime playbook call last week. I mean, that’s the case that we’re making.
Kevin: So you’re saying the abundance is in the debt instruments? It’s in the bonds.
David: Absolutely. In all forms, but particularly government debt. Scarce assets: hard assets, the most attractive still being gold. Goldman Sachs, who still sees 4,900 by the end of next year, so 2026, add $1,000 to the current price. What they noted in their recent comments is a growing competition between retail ETF buying going toe to toe with the continued central bank buying. And we have not had that yet.
Kevin: The retail investor hasn’t been abundant, but the central bank buying has been.
David: Yeah. So one or the other shows up to purchase, and the verdict is out. Is it sufficient to tip the scales, scarcity and supply and demand dynamics driving the price higher? When both sets of buyers are enthusiastically in the market, that’s when prices move, and frankly move faster than most people expect.
Kevin: One of the things that’s been obvious, especially over the last 10 years, has been how China has under-reported the amount of gold that they’ve purchased. I mean, we see it in the markets. If you remember April of 2013, I’ll never forget it when gold lost $100 on that Friday, April 12th, and then another $100 on Monday, April 15th. We wondered where that gold went when it came out of that ETF, the GLD ETF, but 700 tons ended up in China. They under-report, don’t they?
David: They do under-report. Yeah. 2013, 2014 was very interesting because you had flows of gold coming out of London, going to Zurich, being reprocessed into bars, which were then shipped to Hong Kong and Shanghai, and that product will never re-emerge.
The under-reporting aspect is always something that’s difficult to put your finger on. To what degree are they under-reporting? How much buying is being done quietly and not officially reported?
Kevin: How much gold do you have in that back room?
David: Yeah, right. The Financial Times article last week, absolutely worth reading, titled, “China’s secretive gold purchases help fuel record rally.” They’re willing to step out on the limb and take a guess at it. They suggested that China’s unreported gold purchases could be 10 times the official figures.
Kevin: 10 times?
David: Yeah. So officially they’re on track for 24, 25 tons this year.
Kevin: Okay.
David: The Société Générale estimates, based on trade data, that by year-end the number is closer to 250 tons. So again, 10 times what the official reports are saying. The Japanese, or the Japan Bullion Markets Association, they believe that Chinese reserves in total, not just one year’s demand, but in total are now about 5,000 tons, double what is officially disclosed. So the World Gold Council says that in the most recent quarter, only a third of official buying—this is not just China, but all central banks—only a third is being publicly reported, down from 90% four years ago.
Kevin: Okay, so we know, but I’m going to ask the question again. What would be the reasons for buying right now? If you’re a central bank or you’re a retail investor, what are the reasons?
David: Yeah, I mean, gold is this unique asset. This is where it does so stand out from bitcoin or other alternatives as an asset class. Hedging and insurance, I think, remain the biggest reasons to own it. Policy uncertainty, bond market pressures. These are things that are emerging and are now a motivation for investors as well. So central banks are hedging, but they’re not really concerned about equity market volatility. Investors have to look and say, “Okay, so what kind of hedges do we need? Is it a dollar hedge? Is it a currency hedge?” If you’re in—
Kevin: Geopolitical hedge.
David: A geopolitical hedge. Is it a public policy hedge? These are all relevant factors, but equity market volatility is one other thing that gold serves as a hedge for. The overlap in interests with these two dynamic sources of demand are covering dollar risk—there’s overlap there—and insulating from geopolitical risk—there’s overlap there. And it doesn’t take much sleuthing in terms of a daily paper to see that geopolitical risk is very real.
Kevin: Sure.
David: We haven’t talked about it a lot, but the current kerfuffle between India and Pakistan, worth keeping an eye on. They’re close to war, and it’s just one more hotbed, if you will, one more hot zone. So we expect these themes to develop further over the next several years—
Kevin: Right.
David: —and for these demand sources, both the investor and the central bank to pick up the pace of buying.
Kevin: So in that particular case, those overlaps really don’t have anything to do with price. They have everything to do with protection. But let’s talk about the silver market for a moment, because as much as we’ve been focusing on gold, silver’s outperforming this year.
David: Yeah, silver’s a different animal. No central bank buying eats it up, investor demand in competition with increasing industrial demand. Those are the two most critical elements. And you’re dealing with now a five-year supply deficit. Five years in a row, supply deficit. It’s a very worthy investment or speculation, even just looking at the supply dynamics. But again, if you’ve got motivation from a demand standpoint, an investor looking to hedge against inflation, what have you, what we tend to see in a rising metals environment is that silver remains price accessible far longer than gold.
Kevin: Right.
David: And that’s to your average investor, again, being driven on a more exaggerated basis by retail buyers, in part because the market of silver is so much smaller than that of gold.
Kevin: And it’s a thin market, isn’t it? Let’s just look at how much money has gone into silver ETFs versus gold, and look at the performance.
David: Yeah, I’d have to look back at my notes from a few weeks ago, but we talked about the silver ETFs having about two billion in inflows, if memory serves correctly. That’s year-to-date. Whereas gold ETFs have closer to 64 billion year-to-date.
Kevin: So like 30 times the amount of flow into gold?
David: Right. And yet, year-to-date, gold is up 56%. Silver is up 73%—a much smaller market, more dynamic moves in either direction.
Looking ahead, and I am hopeful that we have a further correction in the metals. Not guaranteed. Over the next two weeks, we’ll have two different technical views on the metals and the markets as well, more broadly. But talking to Michael Oliver next week, and then the folks from Elliott Wave just to get differing perspectives, differing wave counts. They look at things using a different model, but still from a technical perspective.
Kevin: Right.
David: But let’s get past a potential correction in the price of gold and silver. Love to see $3,400 gold, love to see 42, $43 silver. That’s not guaranteed.
Kevin: But in the company’s history, we’ve seen silver at $50 twice in the past, or close to $50 twice in the past. Do you think 50 is actually going to be a number that we not just fall from, but we rise from, from here on out?
David: Well, and that’s what I’m getting at. If 50 is a new generational floor, we have a new price regime being made, and not many in the markets today imagine the prices that we could see.
Kevin: Well, you were on an interview last week that the person who interviewed you could not believe that you were even calling for 65 bucks.
David: Yeah, incredulous that in 2026 we could see silver at over $65 an ounce. So I did wonder at the time if she appreciated—again, going back to that five-year supply deficit—these things do happen. I mean, we’ve actually had outperformance, even relative to gold and silver, we’ve had up to 80% gains in platinum this year. And that’s on the basis of a three-year supply deficit.
Kevin: Right. And central banks are not involved in silver, platinum, or palladium.
David: No. But those fundamental factors can be ignored for long periods of time. And then there is a catch-up, there’s a ratchet in price, and I think that is what we’re likely to see, this five-year supply deficit and a general recognition that there’s not as much that can be purchased really at any reasonable price.
So again, I wondered if the host on that show was aware of the five-year supply deficit, and I did also wonder if she’s been sort of drinking the Fed Kool-Aid on Inflation being largely resolved. I mean, setting aside Bostic’s comments, the general consensus is, we’re moving closer to our 2% target. We’re not quite there yet. But we’ve made—
Kevin: [Unclear] get ready to retire, right? Like Bostic. But okay, so you have said over the last few weeks, and I really like the way you’re thinking, that the metals— Gold is expensive right now, but it’s under-owned.
David: Yeah.
Kevin: Would you say the same thing about the other metals?
David: Yeah, expensive at these levels, but very under-owned and platinum and palladium would be even more, to the point. And those markets are even thinner still, relative to silver. Those white metals trade really hot, white hot, in part because they’re so small.
Kevin: I think a good test, Dave, you brought this up in the meeting this morning before we came in here. A good test to find out whether gold and silver is under-owned is coming up because a lot of people are going to be with people coming up here on Thanksgiving, Christmas, people that they don’t normally see. It would be worth asking, “Hey, do you own any?” Or, “How much do you own?”
David: Yeah, ask your friends, ask your family over for Thanksgiving, “What percentage of their portfolio is invested in anything precious metals-related? How many ounces of gold or silver do they personally own? How has your financial advisor framed those year-to-date gains in precious metals? Are they still discouraging these types of allocations?”
Gather your anecdotal data over the Thanksgiving holiday, come back, share what you find in the Commentary comments section. I’m curious what you find. I think there’s going to be plenty of supporting— And again, it’s anecdotal, but how many people do you know who actually have a significant stake in the metals already?
Kevin: Well, and the answer to the question, one of the things that I’ve loved about doing this with your family for the last 38 years is, the narrative hasn’t changed. I mean, the price has. The narrative hasn’t changed. We talk about having an allocation as a percentage for preservation and insurance in any portfolio in any time period. So to be honest with you, if somebody at the family table doesn’t have any gold, there’s an allocation problem, not a decision problem on the price.
David: Well, and this is what has made the allocation strategy now being suggested by the chief investment officer at Morgan Stanley so interesting—the 60/20/20. 60% stocks, 20% bonds, 20% gold, that becomes compelling. Back in the late sixties, early seventies, my dad ran the data on an optimal portfolio allocation. If your object is growth, growth oriented, 75% stocks, 25% gold was the recommendation. We re-ran the number, back-tested the data in recent years, and it’s within a few percentage points of that.
And basically, if you had a 75/25% allocation and did an annual rebalance, in years where you’ve got significant drawdowns in equities, you’ve got liquid dry powder to lower your cost basis in those equity positions, versus the 100% equity owner who then has to just sit tight and play the patience game and listen to their financial advisor say, “Well, you can’t time the markets.” No, but you can be better positioned. I think portfolio construction is where most of your long-term gains will ultimately come from.
If you have yet to position in metals, I highly recommend you talk to one of our advisors. It’s the allocations and it’s the portfolio construction which are the most important choice you can make, assuming you’ve already decided to own the metals.
Kevin: Well, and then you also dollar-cost average, Dave. I mean, I do too. Every two weeks I buy a little and you buy a little as an addition to the allocation.
David: I just checked my inbox. I own more gold and silver as of this morning. I use our vault plan. It allocates money from every paycheck to the metals. So currently I’m positioned and have it set up to buy 70% silver, 30% gold. Those ratios do change more towards 50/50 or even 70/30 the other direction, favoring gold.
Kevin: And that’s what you’re adding. That’s not your allocation.
David: That’s right. That’s how I’m adding, given that the ratio is so much in favor of silver today. But getting personalized advice is what you can expect from our advisors. And I think I would just encourage you here and now to fully engage. I know the holidays are coming. We get Thanksgiving, Christmas shortly to follow, but I think we are at a significant inflection point in the financial markets, and it is a time to be fully engaged.
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Kevin: You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick along David McAlvany. You can find us at mcalvany.com and you can call us anytime 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.
