Podcast: Play in new window
This week, David looks at how past oil shocks reshaped markets and why those lessons still matter today. They discuss the long tail of energy disruption, what happens when supply shocks work their way through the economy, and why real assets tend to come back into focus during periods like this. The conversation also touches on gold and how it has behaved when broader markets are under pressure.
- 1956 Changed Power Forever
- 1973 Yom Kippur War & Arab Embargo Had Long-Term Consequences
- Bond King Jeffrey Gundlach: Strategic Entry Point for Gold
For the Edward Fishman interview referenced click here: https://youtu.be/h9mWmXokvuc
“In 1956, the British implicitly communicated that the era of British dominance and control was over. If they were unable to project power globally, or even regionally, around Suez, you were looking at a not-so-Great Britain. The pound sterling had already lost its luster as the world’s First World War, Second World War concluded and we were rearranging the world through the monetary system. This was the final nail in the British coffin. And Hormuz may well be our Suez. Failure to eliminate a global threat, failure to project power, suggests a phase shift in multipolarity, with the biggest winner in the Mideast conflict being China.” —David McAlvany
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Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany.
David, last week we talked a little bit about the 1970s and the oil shock that occurred at that time. In a way, we should probably review that again because are we in an oil shock right now, and what was it like back then?
David: Well, leading into the ’70s, oil traded sideways from 1950 to 1970. Very tight range, $1.75 per gallon.
Kevin: Can you believe that?
David: Actually per barrel, not per gallon.
Kevin: Per barrel.
David: We wish it was per gallon. Excuse me, that was Freudian. From $1.75 to $2.08 per barrel. Then, in a short period of time, it moves up to over $12 a barrel.
Kevin: So a sixfold move.
David: Yeah, up to 1973. It was six months of chaos, which had lingering effects on the global economy, obviously on the US economy, and acutely so. The lines were not long everywhere because the whole world was not embargoed. It was the US and a handful of countries.
Kevin: People were waiting hours in line, though. I remember that when I was a kid, it was like for gas.
David: Even after that conflict, Yom Kippur, was resolved, and the embargo was over, every asset class was affected in the years that followed. And I think that’s a key takeaway.
Kevin: Well, and that’s something that I don’t think I recognized at that time. I just remembered the energy crisis, but it’s the butterfly effect on steroids, basically.
David: Yeah. For comparison, a similar percentage move today would place current Brent Crude prices north of $275 a barrel.
Kevin: Okay. So what you’re doing is you’re taking that $2 average for 20 years—
David: And the increase.
Kevin: —and then jumping to 12?
David: Yeah.
Kevin: Okay.
David: So close to $300 a barrel. And just as in 1973, oil traders today have priced in this assumption. This is going to be a short-lived period of elevated prices. We’ve mentioned that the oil futures curve, pricing in levels that we had in January, they’re assuming that we will return to that by the end of the year. And traders were wrong in ’73. They thought it was going to be short-lived. It was not. Although the conflict was over, although Yom Kippur passed and the embargo passed, the lingering effects were very significant. And there is a good possibility that our traders are wrong today too.
Kevin: Okay. But as far as volumes go, I would imagine the volumes are much higher at this point.
David: Oh, for sure. From the standpoint of volumes, today’s Mideast conflict is a far bigger deal. When you count the barrels involved, when you count the dollar values of the aggregate energy flowing, percentage price increase per barrel has today been tame by comparison. So commentators are right to emphasize the scope and scale of the disruption. Although, when we think of an oil shock and energy shock, what we had in the ’70s in percentage terms and what folks were facing at the pump was I think more catastrophic.
Kevin: And that was just a couple of nations. We’re talking the United States and weren’t the Dutch affected as well?
David: Yeah. The Dutch were affected. South Africans were affected. Basically anybody who had a close relationship with Israel, there was a punitive tone there. And this is not just a small handful of countries being embargoed, it is the world. And so in that sense there is a more significant impact. It’s not isolated to one geography or a few small geographies, it is a global issue. And of course it depends on how far you have to move the oil and LNG, how far it has to travel. The costs you bear differ dramatically. We talked about that last week, where $3 natural gas for us, it’s not 18, it’s not 25 as it is across Europe and Asia.
Kevin: That’s an incredible difference. We’re paying $3 a gallon for liquid natural gas. And in Europe?
David: For natural gas because we don’t have to liquefy it. I mean, a part of the expense is in—
Kevin: Oh, I see. We liquefy it and then we send it.
David: Exactly.
Kevin: Yeah, I gotcha.
David: So economic growth is squarely on the table, and it’s economic growth global in scope, and it’s at extreme risk. So discussions of stagflation abound for good reason. That is an economic condition, and very distinct from financial market conniptions, which are something distinct from, again, the economic conditions. But they can feed back into the economic conditions from a collapse in the wealth effect. So if you do end up implicating stocks and bonds in a significant way, then I think you have that negative feedback loop into the US economy as well.
Kevin: I’ve been wondering, over the last 24 hours, just listening to some of the things that Trump is saying, if we’re not at a hinge moment right now where we’re either going to go really hard and just take out all the electricity and just ruin Iran, or we’re going to back away and possibly lose the Strait of Hormuz traffic. If Iran controls the Strait of Hormuz after we come away with whatever negotiations or whatever he’s talking about.
David: Yeah. We’re in the clutch moment. Like a good quarterback, it’s the key play of the game, and keeping a clear head and making the best decision, the right call in terms of the play and executing it under pressure, that’s critical. I find myself at a pool table, and the shots that don’t matter I make brilliantly. And the ones that do, man, I’m like, “What happened to me?”
Kevin: So this is important right now. This is very important.
David: Yeah. We’re in the clutch moment where Trump will either relieve the pain at the pump by doing what he can to end the conflict or ramp up the commitments in Iran and throughout the region, turning the country into an ash heap. And to end the conflict now has some short-term economic appeal, as economic growth concerns are becoming acute, people are very aware of it, but it won’t necessarily be a curative to those cost and growth concerns.
Kevin: Well, and I wonder too, if we have too early of a settlement, I mean, what kind of people are left holding the power in Iran? These are not necessarily people who want a business outcome. They want, I think, a form of chaos.
David: Well, to end the conflict now with a settled agreement would indefinitely leave a swarming nest of killer wasps hovering over Hormuz. And they can exact chaos for years to come.
Kevin: How would you like to be an oil tanker pilot right now? Okay? I don’t think they could pay me enough.
David: Right. So whether by toll for safe passage, or by leveraging energy flows to the world to develop further missiles and other deadly arms, to end the conflict now would be embracing all the pain, because we’ve already said yes to a high cost, but with none of the gain. Like selling a portfolio at the lows, it has the same feel of an emotional capitulation. We’re trying to resolve one thing, but it’s ignoring some critical factors, in the case of a portfolio. Maybe values are actually at the end of a decline. Worth considering.
Half measures seem, in the moment, to limit costs. What are lingering costs of not finishing the job of regime change? And you can argue against the idea of regime change, and I think that’s very understandable, but across the Middle East, there is the concern that Iran’s stranglehold over Hormuz doesn’t end if the war does. And so you either neutralize the threat or live with it in some form for years to come. And we’ve had a growing chorus of the Saudis, folks in Abu Dhabi, basically saying, “Please finish. Don’t leave this as a mess.” And what comes to mind is 1956 in terms of the long-term implications. It’s not—
Kevin: The Suez Canal?
David: At that point, it’s not just a Middle Eastern issue, it’s a global issue.
Kevin: And it changes world power, depending on how you walk away. So let’s go back to the 1970s. The Yom Kippur War in 1973 seemed to be the kickoff. You talked about a hornet’s nest. There was a hornet’s nest at that time too.
David: Yeah. Following the Yom Kippur war in ’73, you had the Arab Coalition, led by Egypt and Syria, that attacked Israel. Then a series of dominoes fell, which became the 1970s energy shock, the likes of which haven’t been seen until now. So the Arab attack was followed by a US Nixon-led airlift of arms to Israel. And that’s what precipitated the negative response from Arab members of OPEC. Oil embargo by the Arab members, limited at first to the US and the Netherlands, ultimately expanded to about a half dozen nations, and again, as we mentioned, mostly friendly with Israel.
Kevin: Okay. And then we started to see the dominoes fall in other markets.
David: Yeah. The aftermath of the embargo was felt across asset classes and of course our economy. First, the dollar came under acute pressure. Simultaneously, you had equities which sold off hard. US equities were down 40% in the seven months following the end of the embargo. And I think it’s worth plotting that on a timescale. The embargo ended. The conflict was over. And it was the seven months thereafter that the S&P and the Dow were under pressure. 40% declines in the seven months that followed the end of the embargo.
Kevin: Which is counterintuitive. You would think that the end of the embargo, there would’ve been a lot of money going back into normal assets.
David: Well, it was the end of the oil crisis, but it was the beginning of an inflation crisis which would reprice bonds and stocks, and ultimately take gold from 102.50 in 1974 to over 875 at its intraday peak less than a decade later, just six years later.
Kevin: Those were the first couple of years that your dad was in business, too, in the gold market.
David: Right. What followed was a graver consequence to the financial markets. Stocks, bonds, real estate went through a horrific bear market. And they were all being repriced over a five-year period in the face of rapidly rising interest rates. The cost of capital is something that, as we mentioned in the Commentary when we had our guest on last year to talk about the price of time, it seems very boring. It seems very mundane, this thing we talk about, interest rates.
Kevin: Right.
David: And yet it is one of the most important aspects.
Kevin: It’s the cost of money.
David: Yeah. Which I mean, of course, if you’re borrowing to own a home, today it’s over 6%, 6.34% for a 30-year mortgage. What if it’s 12? We have many clients that were financing homes between 12 and 18%. And just like a seesaw, the higher the rates go on one end, on the other end of the seesaw is the price of the home. And the bond market is the same in terms of its reaction function to higher rates.
Kevin: My wife and I started in 1983 when we got married at 15% interest rates. We had a little 570 square foot condo. And it was expensive at that time because interest rates mattered. But let’s go back now. We’re talking about similarities with the 1970s, but there are differences, aren’t there?
David: Yeah. And I think as many differences as similarities between the periods. If, however, oil traders are as wrong today as they were in 1973, and oil remains elevated for a longer period of time, stocks are, in that case, at the front edge of an extended bear market. We’ve made the case throughout 2026 that valuations are stretched, and that a market’s natural tendency is to revert to the mean, and that should act like gravity in the equities market. A major hit to global growth resulting from an energy shock is merely a catalyst for what frankly you don’t even really need. Gravity can take care of it from here. Mean reversion is a natural course within the marketplace. Now you’ve just got somebody there to push.
Kevin: And this show has always been based on your theory of the geopolitical moving to the political, moving to the financial and economic. I mean, all of those elements are involved in some order. The geopolitical of 1956, you brought up the Suez Canal. If we were to pull out early and show the world that we were not resolved in this, what changes?
David: Yeah, I think that’s where the greater cost is. I mean, we can talk numbers and look at GDP growth, whether it’s in Asia or Europe or ultimately the shrinkage of growth here in the US. We can talk about decline in the equity markets, in the bond market and real estate as a consequence of higher rates. The greater cost of ending the war prematurely is that Trump would signal our Suez moment.
In 1956, the British implicitly communicated that the era of British dominance and control was over. If they were unable to project power globally, or even regionally around Suez, you were looking at a not-so-Great Britain. The pound sterling had already lost its luster as the world’s First World War, Second World War concluded and we were rearranging the world through the monetary system.
This was the final nail in the British coffin and Hormuz may well be our Suez. Failure to eliminate a global threat. Failure to project power suggests a phase shift in multipolarity with the biggest winner in the Mideast conflict being China.
And I remember the Chinese proverb, “Don’t interrupt your enemy while he’s making mistakes.” China has been very quiet in this conflict, very supportive and verbal. When Russia invaded Ukraine and we were talking about throwing in support for the Ukrainians, and NATO was throwing in support, and China was making it very clear that there would be consequences if we did, and they had their own red lines. We’ve heard nothing out of the Chinese in the last four weeks.
Kevin: I wonder what the effect will be, though, on the surrounding nations, the oil producing nations that are getting shot at by Iran right now. I mean, is that going to backfire?
David: You can certainly make the case that the Mideast oil players will find greater alignment with US interests going forward. And so, in a strange way, even though I think it’s fair to say there’s resentment and anger around the starting of this conflict, was this necessary? What has happened subsequently has put them under tremendous duress.
Kevin: Yeah. They’re like, “Hey, why are you shooting at me?”
David: Right.
Kevin: “I wasn’t for this, and now you’re shooting at us.”
David: So reconstructing a security apparatus and infrastructure will include the US. And I think that’s in part because the Chinese have been absolutely silent. So they will rebuild their security infrastructure and reinforce critical protections to their oil and gas assets. China has not provided them any assistance. And the US as primary security benefactor, I think we will continue to see dividends from this rupture in the relationship.
So Mideast OPEC members may be angry about our choice to engage, but Iran’s retaliatory response to their energy infrastructure has biased them toward greater cooperation with the US in the years ahead, and their need is greater than their affection or respect for us.
Kevin: Well, and the way war is fought, sometimes it’s planned years in advance. You can start to see things. We talked about how we could start to see the Iranian conflict coming a couple of years ago as things were being repositioned. We’ve got boots on the ground troops on their way over there right now. You think they’re just on the way as a threat, or do you think that that— And what does that do for the midterm elections? Because the Republican Party is divided on that.
David: Yeah, it remains to be seen if we’ll use them or if we are in the process of turning tail, with our tail between our legs, heading home. There’s costs to the decisions that the administration has in front of them. Can we embrace a higher initial cost, hundreds of billions of dollars, to maintain a global position of power and influence? Will the president risk the midterms by putting boots on the ground in Iran, turning his base completely against him in order to eradicate the threat of Iranian bullying in the region—and now specifically through the Strait of Hormuz? It seems that chickening out in the face of financial market pressure, again, you get a rough day in the stock market and he’s out talking about how negotiations are going great and we’re almost done, and foments a rally in the financial markets.
Kevin: Right.
David: He loves this idea that, like a puppet on marionette strings, he can control and influence. In fact, he has delivered to us a 50,000 point Dow. But only one course of action holds the possibility of peace in the Middle East. And the greatest cost by far lies ahead in our post-1956 reality. If we do pull out and we leave the job undone, I think you’re talking about Russia, China, and the world recognizing—
Kevin: It emboldens them, yeah.
David: Yeah, the greatest military power in the world is not so great. Global rebalancing away from the US, away from the US dollar. This becomes entrenched. It is a trend, but it’s one that I think accelerates pretty significantly. So that ends up being very consequential for US financial markets for years to come. So again, there’s near-term benefits to not engaging, and I think there’s long-term costs as well. Who is the guarantor of global security in a world where we’ve proven the limits of our power?
Kevin: Right.
David: That’s, I think, the reveal. That’s the harkening back to 1956. We have long been a reluctant superpower, uncomfortable with formally claiming the role, but since the end of World War II we’ve maintained a sufficient bluff to maintain a combination of hard power and soft power influence globally. To lose that influence is a very big deal. And it goes beyond the economy, it goes beyond our financial markets, although it does include those as well.
Kevin: And you talked about soft power. Soft power is the use of the dollar. That’s the weaponization of the dollar through the Treasury. We’ve been seeing the dedollarization going on already. So is this possible that we’re seeing— We’ve exposed ourselves militarily, but we were already being exposed by the dedollarization worldwide of oil trade?
David: Yeah. I mean, soft power is also things like USAID and all the programs that, prior to this most recent Trump administration, were “doing good in the world” and as an expression of fiscal largesse, things that we couldn’t necessarily afford. But I think some would make the case that, well, we couldn’t afford not to. We have the opportunity to make a difference in the world. Let’s make a difference. Now, you start looking at the laundry list of things that we were doing.
Kevin: Yeah, you can’t get behind them, but we were doing it all with debt like we’re doing now. Right.
David: That’s right. That’s right. So a 1956 event for the US signals the beginning of the end of dollar dominance. And with it, I think a radical repricing of US Treasuries and US bonds. In that case, you’re talking about the tenuous fiscal position we’re already in, morphing from being hidden in plain sight to just being obvious.
Kevin: Well, so we are, in a way, even though we still have the strong military, we’re between a rock and a hard place right now.
David: Damned if you do, damned if you don’t. That’s the position that we’re in. Press forward with a war that has unbound economic costs, not to speak of human costs, and inflation becomes a dominant theme, embedding itself in supply chains.
You can, on the other hand, leave a radical Shia sect in charge of Iran and in control of Hormuz, and you may still be dealing with embedded supply chain costs. To walk away, you have no guarantee that the price of oil comes down. At $2 million for safe passage, I mean, the toll today to go through Hormuz is two million bucks—
Kevin: Wow.
David: —per boat.
Kevin: Wow.
David: And so send it to the IRGC. They’re happy to take your money. And if there’s a hundred boats a day going through, quick math, that’s real money.
Kevin: And if they’re still in power, that’s real money.
David: Yeah. So move on from the conflict, declare victory, or at least détente, some form of victory. And I think really what you’re doing is signaling failure, regardless of delusions and self-deception to the contrary. I was reading an article in War on the Rocks. I love them. They do a great job.
Kevin: War on the Rocks.
David: War on the Rocks.
Kevin: Huh.
David: If you’re not familiar with them, google them, subscribe. It’s worth it. There was an article from Sheri Biggs, representative from South Carolina, I believe. She serves on the House Committee on Foreign Affairs and Homeland Security. And as a veteran, as someone who’s in the medical profession, who has a background in psychiatry, she says, “This conflict is not just about the Middle East. Rather, it is a signal to every adversary watching our resolve. We have seen what happens when the United States allows its so-called red lines to be crossed. By acting decisively against Iran, we restore a global level of deterrence that has been dangerously eroded. We are signaling to Moscow and Beijing that the United States will not tolerate the proliferation of catastrophic capabilities.”
And finally, she notes, “Strategic indecision does not just embolden our adversaries. It actively degrades the morale and mental health of our fighting force. When our men and women are deployed into harm’s way for objectives that are later abandoned or left unfinished, the psychological toll is compounded. A service member’s mental health is tied to a sense of purpose. If the mission is not finished, the trauma of combat is amplified by a sense of betrayal by the leadership who sent them there.”
Kevin: Yeah. So things you don’t think about unless you’re actually serving, but if you’re serving and you see that there’s not resolve behind the politicians that put you there in the first place, yeah, that can be devastating.
One of the things that comes up, Dave, because we’ve talked so often about the value of real things— Sometimes we go through these financial markets where you go, “Well, what is that really, like a cryptocurrency or something like that?” But real things, things that actually have weight that you trip on at night when you’re walking through a dark room. We still need them, don’t we?
David: Yeah. In either case, however this is resolved and we move forward, the importance of real things has been underscored through this conflict. It is the revenge of the old world, which is very much upon us. Molecules may be mundane, may be overlooked. The conflict in Iran has underscored how vitally dependent the world is on them.
Kevin: Right.
David: Fossil fuels, helium.
Kevin: We don’t run just on ideas.
David: Rare earths. Even if you’d say to yourself, “Well, I’m not really interested in fossil fuels. I think we need to do away with them.” Okay. Well, you love the world of electrification, you love the world of technology. How do you make your chips without helium, and helium’s from natural gas?
Kevin: Well, even a cryptocurrency takes 6,000 kilowatt-hours every Bitcoin. Well, that has to come from somewhere.
David: Yep. So fossil fuels, helium, rare earth minerals. I would encourage you to review our interview with Edward Fishman.
Kevin: That was last year, wasn’t it?
David: Yeah, last July.
Kevin: Yeah.
David: And we discussed his book Chokepoints. I think it’s a timely book on how the world really works in both visible and invisible ways. Whether it’s capital and the control of capital flows—something that’s a little bit more invisible—or control of energy flows, like what we see with the Strait of Hormuz, choke points and leverage in the world of statecraft. It’s not only a fabulous book, but I thought it was a good interview too.
Kevin: Well, it’s an eye-opener because you start to realize the world’s actually run by a lot of these choke points. It’s like moving water. So let’s take the opposite side. Let’s say, “Hey, Dave, AI, we’ve got AI working right now on an energy solution that no man on earth has ever come up with.” Are we hitting a wall that has to be possibly scaled in a different way, green energy or something that we haven’t even thought of?
David: Well, anytime you’ve got a spike in energy prices, the conversation on green energy and renewables will be revived. That’s fine. So maybe this engagement will inspire a new round of interest in green technologies. Certainly the cost differential collapses and the economics of electrification improve relative to fossil fuels when oil and gas prices are skyrocketing.
We again see the revenge of the old world present even as we contemplate a new one, supply constraints on copper, supply constraints on aluminum. I mean, these are the real world impediments to policy success. If you want to go that way and defossilize the world— Electric grid capacity directly competing with data center growth. This is a limiting factor in the real world.
Kevin: Brownouts for people in the afternoon so that you can process the AI that’s trying to solve the energy problem.
David: Yeah. So we have energy security, but we also have to deal with how we deal with the limiting factors in the real world. In a world where the dollar is under severe pressure, which I think we can assume after the conflict— We’ve seen certainly an appetite for dollar liquidity, a liquidity preference expressed and an appreciation in the dollar—till this week with some concerns coming off the table in the Middle East, and the dollar’s moving lower again.
But I think that’s a longer term trend in terms of devaluation. And it is a trend. It’s not a trade. This is not something that you would say, “Well, the dollar’s going lower over the next six months.” No, I think we’ve got a pretty good case to make that it’s been going lower over the last 50 years, and you get to acute points where policies of the government may actually accelerate it.
But I think, as the dollar is coming lower, you also have to look at how do we move towards electrification? How do we buy the stuff that we need?
Kevin: You got to buy copper, right?
David: At a higher price.
Kevin: Yeah.
David: Aluminum at a higher price. Concrete at a higher price.
Kevin: Right.
David: Rebar. I mean, there’s so many component parts that go into, whether it’s solar or hydro or geothermal, it’s not cost free on the front end. There’s huge benefits on the back end, but there are some constraints, particularly in a period where fiscally we’re kind of working with at least one hand tied behind our back.
Kevin: When you talk about fiscally, one of the themes— If we said, is there a theme since 2008, since this show started, the theme has always been: how much money can we spend that we didn’t earn as a country. And it always leads to inflation of some kind, and gold in the time that we’ve done this commentary has gone from around $600 an ounce to where we’re at now, over 4,000. So let’s talk about gold because we have been talking about a correction over the last few weeks, and now gold seems to be moving contrary to some of these market moves down. And I’m wondering if that’s signaling that we might be getting close to the next move up.
David: Yeah, I think last Friday was a healthy sign, talking about gold and silver. Even if only for a day, gold can move and groove to its own rhythm, and it doesn’t have to move in lockstep with the equity markets or other risk assets. Equities were under pressure, but not gold and silver. So follow through this week and into the end of the first quarter, that’s very constructive.
Without a crystal ball, we can’t see here and we can’t say if the worst of this correction is behind us. But I was reading an article by Frank Holmes, and he highlighted DoubleLine Capital CEO Jeff Gundlach calling the recent correction in precious metals a strategic entry point. Urging investors to view the current revaluation phase as a chance to increase exposure.
Kevin: So as a reminder, Gundlach is the bond king now—
David: Yeah.
Kevin: —at this point, right? He replaced Bill Gross, at least with that thought process.
David: Yeah. Last year we discussed Gundlach having taken the mantle as bond king. And it’s always interesting subtext for a bond guy to underscore the need for gold in a portfolio. And it’s meaningful because one of the biggest risks that you have in a fixed income portfolio is inflation. Loss of purchasing power.
You make 5%, but inflation’s running at seven and you’re losing ground by 2% a year, a net negative difference. So how do you stay positive, have a positive real return after inflation? That’s always the concern of someone who’s fixing things, right?
Kevin: Right.
David: The nature of fixed income. My dad was a bond guy in the late ’60s and early ’70s.
Kevin: [Unclear], wasn’t he?
David: Yeah. Yep. Worked for Boettcher & Company. And at the time that was the largest municipal underwriter in Colorado. Gold was a key element in portfolio construction then as it is now, with both growing fiscal and monetary concerns, because ultimately it’s the fiscal and monetary issues, the missteps and policy mistakes, that drive inflation.
Kevin: Isn’t it strange that the bond guys are the guys who actually recognize the preservation power of gold? I mean, your dad— I was talking to Jim Deeds yesterday. He’s 93 years old. He knew your dad back in the 1960s when he was a bond guy. And they both, however, became metals guys, at least in their thinking.
And every time I talk to Jim, you talk to him pretty often as well, he says, “What’s going to happen over the next two years?” That’s how he’s always thinking. He’s not thinking about what’s going to happen next week or in six months. He was talking about his son, who actually is a shorter-term trader and he says, “That’s just not my mindset. I’m always asking, what does the world look like two years from now?”
So with that in mind, Dave, okay, you talked about the Yom Kippur War and the after effects. If we were asking that question from 1973 on, could we have seen some of the after-effects and should we be doing that now?
David: I think that’s what we should be anticipating is the after-effects.
Kevin: Right.
David: We can put it behind us and feel good about it. There’s also implications. There’s trade-offs. To end it shortly, there’s trade-offs to that. To engage more fully, there’s trade-offs to that. It’s an imperfect set of choices.
Kevin: There’s always a cost.
David: So going back to the Yom Kippur conflict and the OPEC embargo, the lag effects in equities, bonds, and metals, I think that’s something to remember. First, the energy shock and then the net effects in the economy, and ultimately the financial markets. Our US recession was over by 1974. The inflationary environment lingered for another six years in real terms.
Kevin: And there was high inflation too.
David: Yeah. So adjusting for inflation, you’re talking about the decimation of bond and stockholders in that period of time. And actually, most of the decline in equities had occurred by the time you got to the late ’70s. It was just that, in real terms, because inflation was creeping higher and higher, in real terms, your returns were even lower and lower. So you’re compounding real negative numbers as you move towards 1980 and the ultimate level.
Kevin: And gold got to a one-to-one ratio with the stock market at the very end of that decade.
David: That’s right. That’s right. Through a combination, we were three to one, and then the Russians invade Afghanistan, there’s geopolitical concern and a panic. Gold doubled in six weeks from 400 to about 875. So gold moved, if you look at the correction lows in the mid ’70s, gold moved eight fold off the correction lows, silver 12 and a half times.
So for us, history does not repeat, but I think the rhyme is nearly audible, and $8,000 gold, $200 silver. I think you’re talking about the net effects of war policy. I think you’re talking about the net effects of an energy shock. I think you’re talking about what was already layered in before Trump said yes to dropping bombs in Tehran, fiscal irresponsibility and monetary stimulation, which has become de rigueur.
It’s what we do when we’re between a rock and a hard place. So as the effects of the Iran war inspire rate cuts, which I think is going to happen in the latter half of this year, I think you can expect to retake $5,000 gold. I think you can expect to take and set new highs. And I hope that you are—and you are, the listener—taking advantage of this strategic entry point.
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You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick along with David McAlvany. You can find us at mcalvany.com and you can call us at 800-525-9556.
This has been the McAlvany Weekly Commentary. The views expressed should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional financial advisor to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany Weekly Commentary.
