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This week’s show is built entirely around questions from our audience. David McAlvany discusses Fort Knox, the possibility of a deliberate dollar devaluation, and how Washington may ultimately deal with the national debt. He also examines why gold has continued to rise without broad participation from American investors and what could happen if retail demand finally arrives. Other topics include the future of the Federal Reserve, the possibility of a central bank digital currency, and concerns over gold confiscation. On the practical side, David covers gold coins versus bullion bars, required minimum distributions from a metals IRA, and building a portfolio after age 55. The conversation closes with his outlook for the next major move in precious metals.
To watch the full webinar recording click here
“We’ve seen, over a long period of time, a loss in purchasing power. It has been a slow erosion. We’re now fighting for the hegemonic position that we had following World War II, and we’re losing that at the margins. People like to extrapolate that and say, “Well, it’s going to collapse.” It doesn’t have to collapse to be highly consequential. I mean, even think of the negative compounding at a 2% rate, which is implied by the inflation target. We have a Federal Reserve which is very sincerely expressing their intent to maintain the 2% inflation target. I’m sorry, whether you’re stealing 100% from me or 2% over time, it’s not any different except at scale. And so I would be less concerned about a cataclysmic decline in the dollar and pay more attention to the slow erosion because that is what is inevitable. In fact, it’s baked into the cake.” – David McAlvany
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Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany.
David, let’s just jump right into the next set of questions that we promised you would answer. “When will the banks stop manipulating the silver price?” Ever? Or ever?
David: When the opportunity for profit goes away.
Kevin: No. Okay.
David: Of course, I mean, you could also look at that when the punitive damages are so great and they’re proportional to the gains, it no longer— It makes the profit look less attractive.
Kevin: All right. Our next question is from an engineer. He says, “As an engineer, I think in terms of control systems where we see a system respond to an impulse and, depending on dampening, either rise slowly till the system finds the new equilibrium— Depending on damping and impulse, the system could also rise quickly, overshoot, and then bounce around until it settles. System response to a control system on a unit step function—” Boy, this is a lot of technical stuff for me, Dave. “The violent move in the metals market at the end of 2025 and early ’26 seems to be that stair step move. The concern that I’m interested in further addressing is why or why not we should expect a move out of the space after the stair step move? Or is there any truth in the analysis at all?” I mean, I think he’s asking, should I take my profits when it gets high?
David: Yeah. Well, first of all, I’m not an engineer, so the answer is going to be a bit of a stretch for me. And if there’s aspects of this where, from an engineering perspective, I’m off course, remember that I’m not an engineer. But I think there are several reasons to think that it may be a new equilibrium. I think the impulse was structural, not merely emotional. So, many market spikes are driven primarily by speculative positioning, and they tend to mean revert. So in that case, you’re talking about an opportunity to take profits. I think this episode occurred alongside continuing central bank accumulation, persistent fiscal deficits, growing debt issuance, geopolitical fragmentation, and questions surrounding reserve assets and what is the most reliable reserve for central banks. Those are slow moving structural forces rather than one-time news events. So not merely emotional.
Kevin: Yeah. Like Morgan’s been talking about, we’re moving from dollar recycling to gold recycling. That is a new paradigm.
David: Yeah. So if the forcing function continues, then the step input has not ended. Secondly, I think the market is still discovering a new clearing price. So in engineering—and again, I mean, this is a stretch for me—after a step input, the controller eventually knows where equilibrium lies. Markets don’t know that. Markets don’t know that. So each new participant enters, and they’re entering with incomplete information. As higher prices attract sellers, simultaneously it’s validating a thesis for new buyers, and price discovery becomes an iterative rather than a deterministic process.
Kevin: So why don’t you take us back to some historic times that that has happened, Dave?
David: Yeah. So I mean, gold has historically repriced in stair steps. Looking over the decades, gold has often spent long periods of time consolidating, then suddenly moving to an entirely new trading range. So again, we’re talking about discovering the new equilibrium. 1970 to ’71, ’78 to ’80, 2005 to 2008, 2019 to 2020, 2024 to the present. Rather than smoothly trending, it tends to revalue, consolidate, and then revalue again. So where the analogy works, I think is when we’re talking about sources of damping. So profit taking, ETF flows, futures positioning, producer hedging, jewelry demand destruction, central bank buying, dollar strength or weakness, real interest rates. These are all sort of mechanisms that absorb shocks and reduce volatility over time.
So likewise, there are positive feedback loops that reduce damping. So momentum investors, commodity trading advisors, short covering. And then what we saw in the fourth quarter of last year, which was really FOMO buying. We did begin to see that emotional component creep in, which is why you could mistake this for final push higher because you did have that emotional aspect, but it came so late in the move. And I think the volumes involved with that FOMO buying were fairly minimal.
Kevin: Well, and Dave, with any form of science, whether it’s engineering or not—
David: But that does create overshoots and I think we had an overshoot.
Kevin: Well, and you can look at it from that perspective, but we are entering a new paradigm. I mean, I think a lot of times, when you’re an engineer, you’re really relying on repeating patterns of things that you’ve seen in the past, but we’re moving into this new paradigm where the Bretton Woods system isn’t really the same as it was before.
David: Yeah. So the more difficult question is not whether we experienced a step response. It’s whether the system parameters have changed. And I think we’ve entered a new price regime, a new equilibrium. So I would argue that this is precisely what has happened, what is happening. For roughly 40 years, the dominant restoring force against higher gold prices was confidence. Confidence in declining interest rates, that’s different now. Falling inflation, that’s different now. Expanding globalization, we have the opposite now. Fiscal discipline, at least relative to today, some version of fiscal discipline, something we’re lacking sorely. And of course, we’ve had the dollar-centered reserve system. These are all things that sort of argue many of those assumptions are changing simultaneously.
Kevin: So that changes the parameters.
David: Yeah. So if the system itself has changed, then historical mean reversion becomes a much weaker guide. So I think this is one of the reasons why some investors exit too early. There’s kind of a behavioral trap in assuming that every sharp advance has to fully retrace because that’s what we’ve seen in so many speculative assets. But secular bull markets can look different.
If you look at the S&P 500 or the Dow, after 1982, it advanced. We certainly had declines, but those declines were by no means the end of a structural move. The same with technology after 1995. They experienced violent advances, corrections, consolidations, yet the dominant trend continued because in that case it was earnings and capital flows kept shifting the underlying equilibrium upward. So I think gold, at least in our opinion, has entered a similar repricing process, not because it generates earnings. So it’s moving for different reasons, but because the market is assigning a higher monetary premium to an increasingly scarce reserve asset.
Kevin: Right. And that’s a hard thing to predict to top on, isn’t it? Because we have just messed the system up with the fiat system so badly.
David: We’re watching a regime change.
Kevin: Next question. Oh, I love this one. Okay. How many people want to know if there’s gold in Fort Knox, right? “I still would like to know the history of gold and the history of Fort Knox and if there’s any gold in Fort Knox, and if so, how much? And do you think we’ll ever go back?” Oh, Dave, you wish we would. “Do you think we’d ever go back to a gold standard, which, sadly, we never should have left?” That’s the question.
David: I have a small book. It’s maybe an 80-page book, which describes the path back to the gold standard.
Kevin: You’ve given hundreds of those away for free at conferences because you want it to happen.
David: And it is easy, but it’s not realistic. And so the mechanisms are clear, but there has to be a political will to do so. So I mean, back to the question of Fort Knox, I think there’s good reason to believe the gold is there, but we don’t know how ownership or what obligations have been put on it. So my concern is more about the leasing and lending, the encumbering, of a good number of those ounces.
Again, back to this question of would we or could we return to a gold standard? No modern politician is going to be willing to subject themselves to the constraints of the gold standard. It puts limitations on what you can spend, particularly deficit spending. And there’s too much benefit in a democracy to essentially buying votes via pork barrel spending and a litany of promises that can be made and delivered on when you’ve got the flexibility of running the printing presses in driving up the national debt to meet those constituent expectations.
Kevin: That is a hard thing to give up when you’re a politician, isn’t it? This next question, Dave, you addressed it a little bit last week, but I think it’s worth hearing again. Or actually, you addressed this two weeks ago when we talked about premiums being low on coins. So listen to the question. “I have collected a fair amount of gold coins over the last 20 years, and I was wondering if I should have been purchasing ounces of gold instead of coins?” What are your thoughts there, Dave, with the premiums being low right now?
David: Yeah, I think you’re good either way. If you’re looking at ounces in bullion form, whether it’s coins or bars, just cheap relative to the spot price, they are cheaper to accumulate. They lack the premium variability, which can be used to trade for more ounces. In the end, I think you’re good either way. You either have more ounces on the front end or the possibility of more ounces through time. Where we’ve seen the biggest benefit to that sort of trading strategy is inside of an IRA where you can trade the premium, get free ounces, and you don’t have to pay a tax bill to do it. So yeah, I think you’re good either way.
Kevin: Okay. Well, and I just will mention, for the first time in my career we’re buying silver, junk silver, 90% silver below spot right now. So sometimes it pays to buy the coins when the premiums are low. It’s just the factor of the market.
David: Yeah. I think I’ve shared this publicly before, but by trading from bags of junk silver at a low premium, in this case, it’s below spot, and looking at the demand dynamics which increase the premiums on those bags, we’ve had five of those trades in the last decade. And on a net tax basis, you cannot hold those bags in an IRA. So after tax, I’ve increased my personal silver ounces by 65%.
Kevin: That’s amazing. Just going back and forth.
David: Exactly. So coins versus bars, bullion versus— In this case, you’re talking about a bullion product that does have premium variability. If you can buy it right and sell it right, you’re able to compound ounces. And again, 65% more silver. I’d care less and less about the price of silver, knowing that this is a strategy that can be implemented across generations. And I just know that the ounces that my kids are managing and compounding continue to do good work.
Kevin: So patterns do repeat, don’t they? Most of the time. Okay. So the next question actually is directly about IRAs. It says, “what are the logistics of required minimum distributions in traditional IRAs in a metals account?”
David: Kevin, you do this every day. Maybe walk us through that.
Kevin: Sure. When you have an IRA, once you hit 73 years old, if it’s a traditional IRA, you have to take a certain portion out. It’s usually four or five percent a year. But Dave, what often our clients do, they have the option of taking the coins in kind if they have a metals IRA, or they can sell them if they’d like the cash, or they can just move them to another storage account that’s outside of the IRA if they don’t want to take distribution.
But what I’m finding more often than not, if they have another account, let’s say at Fidelity or Vanguard or some paper account, a lot of times they’ll just take those required minimum distributions out of paper so that they can leave those metals intact because those ratio trades can be so powerful in an IRA, most of our clients don’t want to pull metals out.
David: Yeah. And I think it’s key to remember that gold and silver are disadvantaged from a tax standpoint, which basically means you get to, in a physical metals IRA, capture something which is very unique within the physical metals IRA. One of the best ways of generating alpha—which is again, a fancy way of saying added returns—is tax alpha. And to be able to not pay the disadvantaged price, be able to compound ounces, buying and selling, buying and selling, buying and selling, you don’t have the capital gains tax to pay there on an asset that’s disadvantaged. Outside the IRA, you’re going to pay more in tax.
Kevin: Sure.
David: Inside the IRA—
Kevin: Gold to silver, silver to gold, platinum to palladium, you can get those gains in ounces and not have to pay taxes. It’s a beautiful thing.
Okay. So the next question, “how does the content of this seminar differ from the original problems of 1913?” That’s an interesting question because we were under a gold standard in 1913.
David: Yeah. I assume this is a reference to the creation of our current central bank. So we had the fire in 1907 in San Francisco, you had a squeeze in the money supply. You had a committee put together to figure out how we could increase liquidity into the banking system during periods of duress when liquidity was scarce. And then ultimately we had the creation of the Federal Reserve in 1913. And of course this is—
Kevin: They snuck it in during the holiday, right?
David: Yeah.
Kevin: Yeah.
David: It was like a December 30th vote. Most people had already gone back home. This is a day and age where going back home was not as easy as hopping on a jet. It took some time. So there was low population of voters, and it got passed. So if you’re interested in the history, The Creature from Jekyll Island goes into some of those details. But I think the problems then were nascent and they were theoretical. So 1913, since then they’ve proliferated and they’ve compounded because of credit growth. So how does the seminar differ, and the content we presented differ, from problems that we created in 1913? Again, theoretical, nascent, now they’ve proliferated and have compounded with credit growth.
The argument for credit expansion is a legitimate one. You expand credit and you enhance economic growth. So arguably we wouldn’t have had the same degree of economic growth had we not had the ability to expand credit. There’s truth in that, but the growth in credit does periodically reach extremes that create classic boom and bust cycles when you have the ability to create an infinite amount of credit. People are not very good at regulating themselves. If a little is good, a lot is better.
Kevin: Yeah.
David: In the credit markets, that’s true as well. If we can make a little bit of money, why not make a lot of money? And over time, you see the quality of credit degrade, you see the risks increase. And ultimately there is a price to pay for a misallocation of capital, and that is sort of the bust side following a boom in the credit market cycle. And this is what we’re living with in a post 1913 world where the boom-to-bust cycles tend to be more extreme. We had plenty of boom-to-bust cycles while we were on a gold standard, but the business cycle was also truncated. If you had a three to five year business cycle, that has now expanded considerably longer. And so we go higher, but we also go lower, and the consequences for owners of assets are, I think, far more significant.
Kevin: Well, and when you talk about credit, we do gain from credit, but it needs to be paid back in real money. And that balance of payments thing was in effect in 1913. No longer is it. At this point, we just go through default after default. And our guest Carmen Reinhart just basically said it’s a cycle of default all the way through the centuries because we stray from the basics.
David: Yeah. And I think it’s also, if you want to look back at some of the changes, we have learned by experience that these bust cycles— This came into high relief during the global financial crisis in the Occupy Wall Street movement. There was an objection to privatized gains and socialized losses. Now, instead of a credit cycle taking out the bad actors, it becomes a burden for the taxpayer. Rather than there being a comeuppance and people going to jail or having to pay a price in terms of their own personal balance sheets, banks can privatize the gains and socialize the losses.
Kevin: Get somebody else to pay your losses, take whatever risk you want.
David: So that’s the system that’s developed since 1913.
Kevin: Going to the next question. And again, we answer this often, but I’m going to do it again. “Building a portfolio for the beginner who has passed their prime, age 55 plus.” Again, Dave, wouldn’t it be the triangle if you’re age 55 plus and you don’t have any gold and you’ve never done anything like that? If you have some savings, you can still chop that thing into three parts.
David: What I like about the Perspective Triangle is there’s implicit humility in it. We don’t know what the future is. We have a growth play. We have a liquidity play. We have an insurance play.
Kevin: But you don’t have to predict correctly.
David: No. And what you tend to find is a younger cohort is willing to take a lot more risk. And part of that is the assumption that they do know the future. They also feel like Superman most days. And then all of a sudden, as you get to 55 plus, your body’s not as resilient. Your time frames to retirement and the need to draw on your reserve assets are more front and center, and you don’t have time to make capital back. So the idea of creating resilience in your portfolio, I think that’s what the Perspective Triangle does. But again, I love the humility implicit to it as well.
Kevin: Dave, I used to tell my clients that age 50 to 60 is one of your most dangerous decades if you haven’t saved enough money because you start thinking about retirement. And oftentimes, that’s when the shysters can sell you something, snake oil.
David: Anybody who offers the highest rate of return is like the last liar in. They will get an account.
Kevin: Yeah.
David: Oh, they’ll offer you 12, but we can do 14% per year.
Kevin: It’s desperation buying.
David: And the calculus and the critical risk mitigation mindset is gone when they’re in that circumstance of, “I’ve got to make more money or I’m not going to reach my retirement goals. I can’t be financially free.” So they end up doing the wrong thing at the wrong time, which is increasing their risk when actually they could be, or should be, decreasing.
Kevin: I agree. Okay. So the next question, “is the fall of the dollar possible, and there’d just be a move into central bank digital currencies, CBDCs?”
David: Yeah. Well, I think there is a lot of talk about the demise of the dollar, and we see the dollar being marginalized. If I counted each conversation, each question, about the demise of the dollar in my lifetime—which, I mean, again, 52 years. I grew up in a family where this was a conversation which was pretty common. But if I had a penny for every time it was brought up, I’d be a very wealthy man just on that basis.
What we have seen is a compromise in quality. We’ve seen, over a long period of time, a loss in purchasing power. It has been a slow erosion. We’re now fighting for the hegemonic position that we had following World War II, and we’re losing that at the margins. People like to extrapolate that and say, “Well, it’s going to collapse.” It doesn’t have to collapse to be highly consequential.
I mean, even think of the negative compounding at a 2% rate which is implied by the inflation target. We have a Federal Reserve which is very sincerely expressing their intent to maintain the 2% inflation target. I’m sorry, whether you’re stealing 100% from me or 2% over time—
Kevin: How is that fair? How is that right?
David: It’s not any different except at scale.
Kevin: Yeah.
David: And so I would be less concerned about a cataclysmic decline in the dollar and pay more attention to the slow erosion because that is what is inevitable. In fact, it’s baked into the cake. It is a policy mandate. This started back in 1992 with the New Zealand central bank. They were the first to bring in inflation targeting. But this is really what has put fiat currencies on a destination with zero. We just like to speed up the time frame because it has direct implications for other assets in the short run, and we’d like to see that now. So maybe we see gold at 100,000 instead of 5,000 because the dollar collapses.
Kevin: I think I’d like to see a Monty Python skit. Okay. I’m thinking about Monty Python back, remember in the ’70s, right?, where somebody goes in to buy a bucket, and it’s got a hole where 2% comes out over time continually. Wouldn’t that be a funny skit? Can’t you see John Cleese just talking about “This bucket’s got a hole in it”? Isn’t that what we’re talking about with a 2% inflation target? It’s like, why is that moral, why is that ethical, and why do we accept it?
David: Well, so to the central bank digital currencies, certainly there is a desire for— From an economic perspective, there’s a desire to get money off the sidelines. And this goes back to a Keynesian idea of the rentier class having excess savings that are not engaged in a productive economic role.
Kevin: How do you see the CBDC doing that?
David: It could certainly drive increased consumption by stimulating use of that currency. In other words, if your currency has a sell-by date, you need to use it.
Kevin: So a penalty for not spending.
David: A penalty for not spending.
Kevin: It’s like having a gift card with an expiration on it.
David: Or a benefit, added purchasing power if you’re spending with particular purveyors of goods and services. But I do think there’s a complicating factor with central bank digital currencies. And this was brought up by a gal who was in line to take over Citigroup’s European banking operations. I was on a panel discussion with her this last couple of weeks. And she raised the point relating to stablecoins, digital currencies, central bank digital currencies. This ultimately is pressure on the intermediation process for commercial banks, and she should know something about intermediation. We create more money supply through deposits and the re-lending of those deposits in the context of a fractional reserve banking system. And you’re talking about completely changing banking as we know it. I’m not sure that people have fully thought through the implications of adopting central bank digital currencies and the impact that they would have for commercial banking, because commercial banking, frankly, is one of the key ways that central bank monetary policy works.
Kevin: Right. That’s how they expand the growth when they put money out there.
David: You change these policies, whether it’s with interest rates or expanding or contracting the balance sheet of the central bank, and it gets intermediated into the economy through lending. Right? So deposits to loans, to economic activity, that intermediation process is undercut with the implementation of central bank digital currencies—
Kevin: So she was skeptical.
David: —or stable coins or other— Very skeptical.
Kevin: Yeah.
David: Very skeptical. And certainly draws attention to the fact that if that’s going to happen, you can expect significant lobbyist push-back from the banks because you’re talking about an existential threat to their business model.
Kevin: So, probably not tomorrow.
David: Probably not tomorrow. And if it’s used, it’s just used in creative ways to stimulate economic activity, incentivizing, getting people off the bench.
Kevin: Well, and it already exists, so it’s not as if it’s some future event. The CBDC actually— There is digital currency, and we haven’t really felt huge ripples yet.
David: That’s right.
Kevin: Next question, and this is a really good question, Dave, because we’ve talked about how there’s a lack of participation from the retail market in gold, so let me go ahead and read the question and I’d like to hear your answer. This is a gold supply and demand question. “As we know, the supply of gold is relatively stable, so the price of gold would move up or down based on demand. David has mentioned that while central bank demand for gold remains strong, the retail investor has yet to participate in any meaningful way.
“What does the price of gold look like in the future if the retail investor never meaningfully participates? Even as government debt rises, the economy weakens, and inflation or interest rates remain elevated.” What if the retail investor’s not interested anymore, Dave?
David: Well, obviously, the retail investor is the swing vote in the gold market, so central bank demand remains critical. If prices are going to accelerate on a more rapid basis or accelerate at all, you would assume you have to have some retail demand. Maybe the exception to that would be this notion that Morgan Lewis has talked about, and did so a few weeks ago, moving from a trade system globally that has been tied to Treasuries and the US dollar, and is, as we speak, moving towards gold recycling. In which case the retail investor wouldn’t necessarily have to show up, but to settle trade internationally and not see an undesired increase in domestic currencies, you net settle in gold ounces, which does create a tremendous amount of demand for gold as it’s adopted.
It would basically be like a re-monetization of gold unofficially. And in that case, you are talking about significant demand increases. If that never happens, if those notions are scuttled—which I can’t see China reversing course, they’ve been on track for this since 2015 and are dead set on capturing more global market share. But if for some unforeseen reason this doesn’t play out, you are talking about added pressure on the gold price with retail investors not participating.
Kevin: Well, but in a way it’s a dream scenario in the long run, because what if— The retail investors make things messy, Dave, to be honest with you. Yeah, we get those spikes like what we saw in January, but the truth of the matter is the market is perfectly happy without the retail investor because gold is gold, is gold, is gold, is gold, historically. And right now, we’re moving back to— Gold has always been a reserve currency.
David: Yeah.
Kevin: We just acted like the dollar was the replacement for gold for the last however many years.
David: Yeah. I think it’s key to remember that you have a repricing of the asset to reflect a lower currency value. And it’s seen most dramatically in places like India and Japan where their currencies are hitting all-time lows or fresh lows in the case of the Japanese yen, 40-year lows. Is it a surprise that an ounce of gold in Japan, regardless of retail investor demand, is priced at a higher level? All it really is is commentary on just how bad the yen is, just how bad the rupee is, just how bad the US dollar or euro or pound sterling is.
And in the world of inflation targeting, central banks are lowering the value of their currencies systematically, which implies a natural function for gold to go higher regardless of demand. It just is reflecting a lower currency value. It takes more currency units to buy the same thing.
Kevin: Jim Carrey, when he played the Grinch, one of the things he said was, “Solve world hunger, tell no one.” I’m thinking possibly buy gold, tell no one.
David: I like it. I like it.
Kevin: And just keep the retail investor out, and just over time, let it do what it’s always done, which is preserve, preserve.
Next question. “Kevin Warsh’s potential impact or anticipated changes at the Federal Reserve, what are your thoughts?”
The Fed has continued to grow its power and reach and this listener says it needs to be scaled back. Well, of course it does, but what are your thoughts? What is Kevin Warsh’s impact? If you had to have a crystal ball, Dave, and you were looking over the next two, three, four years, what are we going to say about Kevin Warsh?
David: Well, we addressed it in the last series of questions that the approach to managing inflation is to redefine what inflation is. Rather than address the issue, change the terms.
Kevin: Right. We will now call it this.
David: Yeah. I think that’s one of the things that we’re going to see. And of course this is not just Kevin Warsh, this is the BLS and the BEA. But one of the things he’s made clear, forward guidance is gone, so what we’ve had in the last 25 years in terms of the financial markets being able to anticipate what the next move is and trade in front of it, basically front-run monetary policy, that’s gone. And it seems like other central banks are sensitive to that too. They’re willing to go along with the end of forward guidance.
What that means for the average investor managing a stock or bond portfolio is that you can expect more volatility in price, because surprise naturally elicits reaction. And the bigger the surprise, the more you’re taken by surprise, the more there is an off footing in the financial markets where all of a sudden people are finding that they made the wrong decision and now have to right-size their portfolios to reflect it.
Kevin: Dave, this next question is pretty simple. It says, what are your short-term insights on oil supply and demand? What are the prices looking like? Got a lot of factors right now with the war, but things were happening even before the war broke out in January, so what are your thoughts?
David: Well, there’s the headlines which are going to drive the price one direction or the other in very volatile fashion in the short run. The more important things to keep in mind are global supply and demand as that continues to develop. We have a natural increase in demand, given demography and economic growth globally.
To the degree that you’re looking at global GDP growth and demographics, there is natural upward pressure on the demand side. On the supply side, we’ve got a number of geographies which are getting old, and the cost of production is going higher. It’s not as simple as putting a straw on the sand and letting it naturally flow out. And where we’ve seen, in the last decade, 90% of growth in supply has been in the US shale basins.
That’s great. The issue is decline rates are typically not adequately counted for. You get most of your production in the first year or two, 60, 80% of the production, and then it drops considerably. So, it requires a continual drilling and exploration.
Kevin: A lot of new restarts.
David: And we have plenty. We have plenty of oil in the US, and we have plenty of natural gas, probably too much, at least for current pricing. So, we’ve gone in recent decades from being a net importer to now being a net exporter. And I think there’s huge economic resilience for the United States having the base of energy that we do—cheap supplies of natural gas, which we’re translating into liquid natural gas and exporting to Europe, exporting to the Asian markets. And the margins on that are fabulous, absolutely fabulous.
The short-term insights on oil and gas supplies, we are seeing decline rates in the Permian. We are seeing decline rates in the shale basins. And that should put upward pressure because we’re not dealing with immediately available infinite supply. We’ve got a lot of supply, but it’s not immediately available. Price has to be high enough for there to be an economic incentive for producers to go drill. The Trump administration has made clear we need to create more supply. And he’s pounding the table, come on guys.
Kevin: Well, and we have it. It’s going to take some investment though, right?
David: Right. It’s this catch-22. Nobody wants to invest in new supply on the basis of the current headlines vis-a-vis the Middle East, because they know this is temporary.
Kevin: Or the next election, right? I mean—
David: Or the next election—
Kevin: —I mean, how often does that happen?
David: —that policy can shift and we can go back to reinvention of the Green Revolution and punishment for anyone who’s in fossil fuels. There’s some hesitation by the producers to gin up new supply. You got to have prices consistent, sustainable, 80, 90, $100 a barrel, not the one-off spikes that we’re seeing to 80, 90, $100 a barrel based on news headlines.
Kevin: Right.
David: I think we’re seeing a temporary push in price because of Mideast headlines. Meanwhile, we’re seeing decline rates increase, if that makes sense. Decline rates are going to be an issue in terms of US production. And that will reach an inflection point sometime in 2027, 2028, where people realize, oh, we can’t indefinitely produce 13.7, 13.6 million barrels per day here in the US. As the marginal contributor to supply growth, all of a sudden that’s going to be reflected in price.
Kevin: The next two questions I think relate to each other, whether they were intended to or not. The first one is, “when I list government debt as the number one concern, it is because I believe that increasingly it will drive the other risk factors. We’ll have inflation because of it, declining purchasing power because of it, and increasingly heavy-handed foreign policy because of it. How is the government likely to address the debt issue?”
David: We’re dealing with an increase in the cost of capital. There are inflationary pressures which are driving interest rates higher, which make government debt less sustainable. We’re also dealing with the supply issues, too many IOUs, not enough demand. And as appetite globally diminishes, a willingness to subsidize the US government and the US consumer as those abate, we’re dealing with an increase in the cost of capital. It’s very significant. It does drive other risk factors in the marketplace.
As the cost of capital increases, it changes profitability metrics for corporate America, it increases the risks of success for entrepreneurs. If you’re borrowing at 2%, there’s latitude for mistakes to be made. If you’re borrowing at 10, there’s less latitude for mistakes to be made. Your business plan has got to be impeccable and your time to deliver revenues is much shorter because again, the clock is working against you, mainly because you’re dealing with the price of time increasing.
So, inflation is an issue, declining purchasing power is an issue. The net effects as you see this translate to higher rates for the government, yes, they are going to be increasingly heavy-handed with foreign policy. Desperate governments do desperate things.
Kevin: Morgan calls it Hamiltonian economics, tariffs, and you’re trying to address it with foreign policy.
David: Correct. We got a taste of that with Venezuela. I think the assumption was that we’d waltz into the Middle East and capture more of reserves from Iran and—
Kevin: It’s not working out well.
David: —stabilize this inflationary trend by controlling not only the largest reserves in the world in Venezuela, but I think Iran is number five in terms of reserves. And it hasn’t worked out quite that way.
Kevin: Not so far.
David: No.
Kevin: Not so far. This is why I thought another question from another listener might be how they think the government’s going to address the debt issue. The question is this: “Could there be a US reset of some sort that would devalue the dollar and deal with the 35 to 40 trillion-plus deficit?” What do you think about a reset, or do you think they’ll just let it gradually reset as it has been?
David: Some of my reading on pound sterling and the history of devaluations, most of them were not gradual. They were 20, 30% devaluations overnight. And it was an orchestrated move. We could certainly see that, we had it back in 1933, 1934. Depending on how you count the math, it was a 41%, 60%—depending on, again, how you’re doing the math—devaluation overnight as we went from 20.67 on the gold-to-dollar exchange rate to $35 an ounce.
Kevin: Right.
David: Could we see it? Yes. I think that they’re concerned that the financial markets today are so leveraged that we could create more problems than that singular solution through devaluation.
Kevin: Well, I have a question for you. What do you devalue it against? If you’re not on a gold standard, how do you devalue a currency just with an announcement?
David: You devalue it against other currencies.
Kevin: Okay. I see.
David: So it’s fiat versus fiat.
Kevin: Right.
David: And I think—
Kevin: That’s a currency war, then.
David: It is a currency war.
Kevin: And we’ve got a guest coming on who wrote a book by that title.
David: Yeah, Jim Rickards.
Kevin: Jim.
David: Yeah. So the design seems to be to gradually control a devaluation, and that can be done in a couple of different ways. But I think the most effective way is to run inflation hot and lie about the inflation statistics. So if you let real world inflation run at four or five percent, but you’re actually hitting the target statistically at two, which we talked about earlier, you just redefine what inflation is.
Kevin: We’re going to rename it.
David: You’re still running inflation hot. And the real world impact, you are going to be paying back your IOUs with cheaper currency units. That is a very helpful way of reducing the debt burden. A very effective way. You just have to do it in a subtle enough form that your foreign creditors don’t revolt or the bond market doesn’t revolt, which is, again, why you talk one thing, you do another. This is where you have to appreciate the amoral nature of foreign policy and domestic policy. There is a need to get a certain number of things done. And you and I consider our word to be our bond.
Kevin: Sure.
David: In politics, you can say whatever you want, and then do whatever you want. And in international relations, it’s the same. You can say whatever you want, and you can do whatever you want.
Kevin: But no country is a friend to another country. That’s an illusion. It’s just pragmatic, right?
David: Particularly in this period of de-globalization, which we talked to Harold James many years ago about his book on de-globalization. I think he wrote it in year 2000.
Kevin: Yeah.
David: Very prescient. And he wrote a subsequent book in 2008 where he was predicting the end of this globalization period. And he’s been spot on. But people start to think more in terms of the national interests, the value of their currency, the slice of the pie that they have in terms of global trade. And if we were to devalue overnight, there would be a very, very negative reaction with our trade partners. It would be too obvious what we were trying to accomplish. Better to tell them one thing and do another, and hope they believe what we say. Hope that they listen to our words and not look at our actions.
Kevin: So you would see a continuation of financial repression, basically?
David: Absolutely. No, absolutely. Inflation financial repression, absolutely.
Kevin: So I’ve heard this, Dave, since I started here 40 years ago, that the government is going to rob our retirement portfolios, that they’re going to maybe take over IRAs and somehow apply it to the national debt. Have you thought about that? Have you thought about what are the possibilities of that? Because this is what the question is asking, “is the government going to rob our retirement portfolio?”
David: Well, we’ve kind of talked about this already. They are robbing your retirement portfolio—
Kevin: With inflation.
David: —with inflation.
Kevin: Sure, sure. And it’s working a lot better than taking everybody’s money away, right?
David: Yes, because it’s subliminal. It’s below the threshold of perceived pain. And so below the level of reaction, they can get away with that.
Another potential move would be a shift in the prudent man rule, where we’re going to define for you what it means to have proper allocations within a retirement portfolio. And there is no one on Wall Street who can argue with a shift in the prudent man rule. If a 30% allocation to U.S. Treasury bills, bonds or notes is a definition for the prudent man rule, you’ll find Fidelity and Charles Schwab and everyone else stuck. Because to be compliant with the prudent man rule or face penalties from the SEC or the federal government, the Department of Justice, whatever, you have to be compliant. You have to be compliant.
Kevin: That would be a guaranteed buyer of Treasuries that are getting harder and harder to sell.
David: That’s right. So a shift in the prudent man rule, that is clearly a potential outcome. It hasn’t happened yet, but it’s something that might be on the radar. Would that cause me to jump out of retirement accounts and take a tax hit? No, it wouldn’t. It wouldn’t. You’re now realizing gains and putting yourself in a very disadvantaged position from a tax standpoint on the basis of something that is today still speculation.
Kevin: Okay. I’m going to finish with this question, Dave, and it’s a two-part question. “How long before the precious metals start to climb again? Also, what are the chances of a gold confiscation and then resetting the gold price?” Because we talked about a devaluation. This listener is asking, “what is the chance of a gold confiscation going forward and then resetting the gold price?” What they’re really asking is resetting the dollar price relative to gold.
David: Yeah. Well, let me start with the confiscation piece first, because I think it’s important to look at what gold confiscation was and was not in the 1930s, the last time it happened. It was a seizing of the money supply and it was the Federal Reserve getting control of liquidity within the system.
Kevin: Right. And gold was money at that time.
David: And gold was money at that time.
Kevin: Officially, yeah.
David: Correct. And gold was ubiquitous. If you had a $20 gold piece in your pocket or a $20 bill, they spent the same.
Kevin: Mm-hmm, right.
David: And there was a lot of it out there. So if you look today, they have control of the money supply. They could come up with another reason to do it. But there’s another problem, which is very few people own gold. If you talking about the vast [population]—330 million people in the United States—there’s just not many owners. What would it accomplish?
Kevin: What’s the percentage of owners within that 300 million people?
David: It depends. I mean, we’ve talked about this a few weeks ago, where family offices, 72% have zero allocation. And the average across all high net worth family offices, according to JP Morgan’s most recent report, one to two percent. It doesn’t get you much.
Kevin: Very little impact. They’re not going to get much.
David: No, the greater possibility is, like Judy Shelton has mentioned, the proposal of a gold-backed bond. Now all of a sudden you’re bringing in legitimacy to the currency and stability to the Treasury market by a bond which pays no interest, but settles in gold at some future point. I think that’s far more probable.
Kevin: Okay.
David: So how long before precious metals start to climb again? You can look at this from a couple different vantage points. One is the normal seasonality of the gold market, which June, July are typically the lows of the year. And statistically, we’ll see a small uptick in July and begin to see real movement in the metals in August and September as you move into the Indian wedding season.
Kevin: Yeah, July’s always been one of the best months to buy.
David: We see the Indian wedding season as still being relevant. Culturally, 1.4 billion people, largest population on the planet. They buy a lot of gold in this season, post-harvest. And as they move towards marrying their brides, this is the preferred gift. We’ve seen some substitution in recent years as the price of gold has gone higher, and it’s favored silver. So both actually are now sort of in the hot seat, and they’re on the buy list as we come into August and September. So, on a short-term basis you could look at it through that lens.
On a longer term basis, I think you’re talking about a much more significant move, not just culturally driven, but existentially driven, where people reconsider their counterparties. It’s not going to take much. It’s not going to take much. You’ve got speculators who are long out the years equities, largest percentage of equity ownership in the U.S. in all of history. And an increasing percentage using margin—of individual investors using margin, using leveraged funds, leveraged ETFs—where the downside is greater than it would have been otherwise because you’re on leverage.
Kevin: You had mentioned last week that we’re one crisis away from a major shift.
David: One crisis from a major shift. And this is where the counterparty risk, we come back to the Basel III question asked, was it this week or last week? Basel III made very clear there is a difference between gold in an allocated form and some form of gold derivative. And so I think it’s important to keep that in mind. People don’t care about the distinction until they care about counterparties. And when they care about counterparties, now you’re talking about price being irrelevant. It is an asset allocation shift which has a huge impact on the market, particularly since you’re dealing with limited supply.
Kevin: Yeah. So bearer assets are very important, right? We were talking about that with your son.
David: Exactly.
Kevin: Bearer bonds, Die Hard.
David: We were talking about Die Hard, exactly.
Kevin: Yeah, that’s right.
David: And Alan Rickman’s first major breakout role. Amazing.
Kevin: Yeah. And gold is a bearer asset.
David: It’s the only bearer asset anymore. I mean, think about it.
Kevin: It is.
David: You don’t have bearer bonds anymore.
Kevin: No, no. Well, let’s get our gold.
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You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany. You can find us at McAlvany.com and you can call us at 800-525-9556.
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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.
