About this week’s show:
- Central Bankers fantasy façade is failing
- Negative rate paying bonds top 11.7 trillion dollars this week
- A lot of money is going into govvies and gold: What’s up?
The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick
“I think as you consider transitioning from gold to other assets, you need to consider doing it, because as the price of gold increases, it is going to end up with a target on it, a set of crosshairs on it. What is the number at which it becomes a political target? Is it $2,000 and ounce? $3,000 an ounce? I think you’re still very obscure.”
– David McAlvany
Kevin: You know, there are places that I’ve been, Dave, like Disneyland or Las Vegas, that when you first get there, the glitz, the glamour, the wanting to believe it’s real, is very real. I’ve enjoyed that at Disneyland, taking the kids – you see the reality, but if you go for day two you start seeing behind the curtain a little bit, you start seeing the nooks and the crannies, and by day three, it’s really just make-believe. I’m thinking about what is going on now with the central banks. We’ve had the 2008 crisis where people really wanted to believe we were going to have a recovery, and the central banks delivered the fantasy. But at this point, after Brexit, even though they are still able to deliver a fantasy, it now really looks like a fantasy.
David: Right. You have verbal interventions which have been on track. We’re getting used to that, I suppose. And of course, we’ve also gotten use to the spending of billions, in this case, it’s euros and pounds, in other cases it’s yen and dollars. But that, in the last few days, has completely reversed the market sell-off which was triggered by the Brexit vote. Here’s the problem with managing markets. On the one hand, you have had the idea presented that Brexit really represents the sum of all fears for the financial markets.
And on that basis you have the established interests in Wall Street and in your various political capitals around the world, who tend to champion the status quo. They would like to harness that fear. They would like to harness the fear of economic slippage and market decline and say, “Look, this is all pinned on Brexit. This is a direct result of Brexit. Everything has to do with the British and this asinine notion of people going it on their own.
Kevin: “Somebody do something!”
David: Right. So you have deviation from the establishment playbook, and yet you also have the central bank community who usually backs their play, and the central bankers are compelled to keep the markets from flying off the rails. And so the markets have stabilized over the last week, and that fear meme, that fear theme, if you will, seems a little overdone. So, which is it? The end of the world as we know it, or a continuation of an eight-year trend where the markets know only one real influencer, not supply and demand by investors, per se, but the artificial capital from central banks, the central banking community, which has pushed speculation into the stock market as a means of boosting asset prices.
Kevin: And this fantasy does continue, and people do want to believe it, because I received two calls last week, one from a relative, who said he has been watching financial TV. He said, “With gold going up at this point, should I go ahead and sell my gold and get into the market, because they’re telling me that this Brexit drop was probably false, and the stock market is going to new highs.” It shocked me a little bit, and then I got another call from someone else who said the same thing. I’m not saying this generally for everyone, but there are people who are wanting to believe that this eight-year fantasy that has been brought on completely by the central banks will continue, the fourth day at Disneyland, maybe.
David: That’s right. You have one clear take-away, I think, and it’s that the central banking community fears the collapse in asset prices and a severe deflation far more than they do populace sentiments, whether that is voters here in the U.S. or hither and yon, could be Italy tomorrow, it could be France tomorrow. It was Britain yesterday.
Kevin: Let’s unpack that. Why would a central bank fear deflation? I think it’s important for everyone to hear that.
David: I think it could boil down to something as basic as self-interest. Perhaps that’s what it is. Bankers do tend to care about bank assets, and bankers do tend to care about solvency, with a very piqued interest, right? So, you have politicos that fear the things which upset their apple cart, right? And bankers do, too. For one, it’s the masses. Politicians tend to fear the masses, and bankers tend to fear the assets which they have blown up into bubble proportions and must be kept at elevated levels or the banking sector will be laid low.
Kevin: In this last eight years, let’s just go ahead and put the blame where it is. For the person who is not earning interest on their bank account now, we need to understand, it’s all about the bankers. It’s the bankers, stupid. The bankers want us to believe that they absolutely have to be protected because they’re protecting us. In reality, their bottom line is really the only thing that is benefitting from these zero interest rates.
David: And I’m not one, actually, to believe in a cabal of evil men controlling the world from behind the scenes. If you do see a theme develop amongst people it is that they share a common self-interest, and they want the same things, not because of some evil plot, but because they care about themselves more than they do anyone else, and they happen to be running in a parallel track with people who are trying to preserve the very same things.
Kevin: They happen to have the ear of the people who are also creating the narrative that comes through the media.
David: So, with banks being catered to by central banks, we find an interesting similarity to 2008. As the global economy continues to ebb right now in the present as it sort of slips away, you have speculators and you have traders who are buying up risky assets on the belief that central bank commitments, their intentions, in essence come with a guarantee, as if the central banking community was imbued with omnipotence, omnipotence that, all-powerful, god-like, we can do whatever we want, whenever we want, to whatever effect we want.
And it’s ironic, central bankers have proven that they’re, in point of fact, incapable of generating economic growth and they are only generating asset price inflation. Again, that is via the increased liquidity flows, a decrease in the cost of capital. So to me, it hangs out there as a question: Omnipotent or impotent? I think history is going to be the judge by results, not just rhetoric.
Kevin: If Europe is any indication of the direction that we may be going, the banks already there are starting to show that the fantasy is wearing off.
David: Right. It’s very weak economic activity, and if you look at banks, in general, they, in the European space, showcase that weak economic activity. They showcase very fragile balance sheets. Truly remarkable if you think about the amount of balance sheet reshuffling and reorganization that has occurred, and of course, that is compliments of the European Central Bank.
And of course, what is that? That entails their asset purchase programs. You have the big banks in Europe that are, today, at or near their 2009 lows, of you are looking at stock prices. You have U.S. banks which have been under massive pressure, declines on par with what we saw in the 2011 timeframe, as the great concerns about European implosion were at the front of everyone’s minds.
So, you have Wall Street insiders, and I guarantee you, Wall Street insiders know the length and breadth of a real economic recovery by the participation of the financial sector in the fruits of that boom, right? And if the boom doesn’t exist, or if it’s a fledgling boom and they’re anticipating more, as it were, then you see huge movement, positive movement, in the financials, that is, your banks, your financial firms, etc. And yet, that’s where you are seeing quite a bit of pressure right now.
Kevin: We’re seeing movement out of that, and movement into gold. These are the guys that seem to be accumulating gold, or the insiders that should be, if we have a recovery, moving back into the financials.
David: Yes, I think it’s a safe conclusion that the movement into gold since the beginning of the year is an indication that investors know all is not well. And in essence, what they are trying to do is hedge their bets. So, gold is no longer just an Armageddon hedge limited to the investment fringe, as is usually suggested by Wall Street. That’s kind of how it’s categorized as, “Yep, if you wear a tin foil hat, obviously, you would also be categorically in line for gold.”
Well, the mainstream investor – what is he doing? He’s trying to see how the numbers work. I think the mainstream investor, more and more, is concluding that not all the numbers being provided by Wall Street and the media add up. Here in the first six months of the year we’ve seen traffic into gold equal to 40% of annual mine supply. That is a massive influx into gold. Why? Was it Brexit? No, it was not.
Kevin: This was happening before Brexit.
David: Most of the volume of purchases occurred prior to the vote. Certainly, the vote kicked off a little sensationalism and investor worry, but as we said earlier, nothing like a little central bank salve to take away concerns, and you look at where the FTSE 100 is, that is, the top 100 companies in the U.K., along with the S&P and the Dow, and the sell-off that we had following that vote, we’ve put those points right back on.
Kevin: The purchase of gold is usually driven by fear. Fear is usually driven by uncertainty. So, we might be surprised who is actually buying right now.
David: I think the same types of investors who are running to gold are going to that as a safe haven for the same reason that investors are continuing to run to government bonds. They are afraid of what they don’t know and they are afraid of what they are not being told. And there is that great suspicion that they are not being given all the facts. Is that reasonable? I think as they have a real-time study in terms of European politics they see that the general public is kept largely in the dark and treated like mushrooms, and we know what mushrooms are fed.
Kevin: Right.
David: So, they are afraid that they know, at a gut level, what economists really can’t acknowledge, and they are not able to acknowledge because they have their theories which explain the world in a comprehensive fashion and create something like theory blindness. And of course, politicians are loathe to acknowledge the same, that people are not happy because the recovery theme that they created, and have suggested and repeated over and over again, that recovery theme which has been going on now for seven years, doesn’t have more than a small sliver of truth to it.
Kevin: Do you think this is why there has been sort of an explosion of populism? The man on the street is saying, “Wait a second. I don’t buy this, and I’m willing to actually sacrifice to vote a different direction than you guys want me to.”
David: Sure. Populism – you have the radical shifts occurring in political circles all over the globe, and it underscores the broad base of people who are dissatisfied, who are disaffected, and feel that they have been left behind by the central bank agenda which has created a bubble, and perpetuated that bubble. You have the establishment, because of their disingenuous promises – peace, prosperity, wealth for all – I think they have inadvertently, by creating this recovery theme, which was based on faulty numbers – they’ve given birth to skeptics, they’ve given birth to doubters, they’ve given birth to a class of society that presumes a high degree of B.S. flowing from centers of power, whether that is central bank power, whether that is governmental political power, whether that is academic power. And this is what is fascinating to me – I spent time reading through The Economist and the Financial Times over the weekend, Kevin. It was interesting to see the bafflement, the befuddlement, of …
Kevin: Of the elite.
David: Of really smart people saying, “Wait a minute, we had all of the economists and academics lined up to say, ‘Don’t do this, or the consequences will be X, Y, and Z,’ and the general public did exactly what we told them not to, as if they can afford to ignore the best and the brightest, as if having a Ph.D. doesn’t mean anything.”
Kevin: I know, I got one of the articles from Foreign Policy, which is sort of an elite publication, and there was an article that basically said that the elite need to wage war on the masses because they don’t understand what they’re doing to themselves.
David: I read that same article, Kevin.
Kevin: It was disgusting.
David: It was one of those things that turned me green, and actually made me a little angry, because I think of the essay by G.K. Chesterton, Twelve Ordinary Men. He makes the case that when you look at the legal system and have twelve ordinary men on a jury, what makes them powerful is that they’re ordinary. What gives you safety and security as a person in the courtroom is the ordinariness of those men, or women, as it were. He goes on to say – there is a parallel – when you look at the twelve disciples, these were not scions of intellect. These were not members of the elite, so to say.
Kevin: They were not part of the rabbinical elite, they were not part of the Roman elite at the time. You’re exactly right.
David: The disciples of Christ were the most ordinary of men, and on the basis of their ordinariness, they were closer to basic truths that transform life than those who were stuck in a theoretical framework of what must be. And so they had a different kind of expectation, and they had a very powerful impact. If you look at first, second, third, fourth century – if you look at Roman history, if you look at the history of the Mediterranean in the first four centuries, it’s fascinating to see the impact of just a few country bumpkins, right?
And it wasn’t on the basis of wealth or brain power, but there was a veritable revolution in the first, second and third centuries, and it had mainly to do with the qualitative character of these people, and how it began to change culture from the bottom up, not the top down. And so, it’s not a surprise to see those who presume that everything must trickle down from the top surprised that some things do happen of a radical nature from the bottom up, not just the top down.
Kevin: It almost reminds you of the theme of the movie Braveheart, where you have the common man willing to give his life for a principle – or the American Revolution – to not accept what the elite are dishing out at the time.
David: As we see the audience for gold and silver grow, I think it’s also important to note that there is a major increase in government bond buying at the same time, and this is curious because the government bond buyer today, I think, is the gold and silver buyer tomorrow.
Kevin: Let’s just stop on that for a second. The government bond buyer, which is the largest market in the world, is the gold and silver buyer of tomorrow, if they can get it.
David: What they are doing is they are moving to what they view as a safe haven asset, for the same rationale and reason that the gold and silver buyer today are moving to gold and silver as a safe haven asset. The government bond buyer today still has confidence in the Treasury, still has confidence in the power structures. But what you are seeing is a gradual migration, we talked about this before, the gradual migration into the gold and silver camp, and what it represents is a no confidence vote.
It is a no confidence vote and there are still a lot of hold-outs, people who say, “No, no, no, we will turn this around, and I’m willing to accept a negative rate of interest. Although I want security for my assets, I still have confidence that the powers that be will turn this around, and I don’t have to worry about the old threat of a government bond becoming what used to be called a ‘certificate of confiscation.’ I’m not worried about that, I do believe I’ll get my money back, and I don’t care if I give up a little bit in terms of foregone income. In fact, I will receive less in principle back. I’m okay with that, as long as I get most of my principle back, and know that I maintain liquidity.”
Kevin: And you see that as an interim step. In other words, the government bond buyer, due to habit, due to what may be convenience – is willing to take a slightly negative rate of return, but as things get worse and worse, that is the buyer of gold. Now, there is not enough gold to go around at the price that it is at today when this happens, Dave.
David: No, there is not, and people don’t appreciate how thin that market is when it comes to needing to accommodate a global audience. We’re seeing shifts, not only from the beginning of the year until now where the price of gold is marched up better than $300 – we’ll talk about that a little bit in a while – and silver, quite frankly, has impressed. Over the weekend we eclipsed $21 per ounce off of a low of $13 and change.
Kevin: Just a few months ago.
David: A 47 percent move since the beginning of the year. And what does this signify? What it is signifying is that there is a growing audience of people who think there is something wrong with the financial system and the options they are being given.
Kevin: Let’s go to the size of the bond market.
David: The last shred of confidence in the treasury market, in the government bond market – when it is lost, and is no longer deemed to be sort of the port in the storm, but rather, the funding mechanism for a part of the problem, you begin to see the mass migration occur into metals, and I think that is your blow-off phase. I still think that is a few years away, but you are already dealing with a very thin market that can’t accommodate the volumes, and you are seeing it reflected in price. When we have suggested that gold will trade north of $5000 an ounce, that seems preposterous today. You just don’t know how thin the gold and silver market is. You just don’t appreciate it.
Kevin: Right. And we’re talking billions in the gold market. Let’s go ahead and look at it in frame of reference of the bond market, this audience that someday will move to gold. Trillions, Dave – we’re talking trillions. A couple of weeks ago you said there were 10 trillion dollars[’ worth of bonds] worldwide that were paying negative rates. That’s increasing, isn’t it?
David: It is. It was 10 trillion this last week – the total amount of bonds trading hands in negative yield territory reached 11.7 trillion dollars.
Kevin: So, another 1.7 trillion negative since you talked about this two weeks ago.
David: And investors – what are they buying? They’re buying the assurance of viability, on the belief that governments will go bankrupt last. They’re buying liquidity, knowing that government bonds are one of the largest capital pools on the planet, and it allows you to come and go as you please. Even if the yield is ugly, they know they can get most of their money back. That is, of course, an assumption. They will get most of their money back – so they believe. And yields reflect foot traffic into the perceived safe haven of government bonds. So gold is not moving irrationally.
Gold and bonds are of interest because fear pervades, even though central bankers are boosting equity prices and encouraging rampant speculation. Notice the disconnect here. While you have the stock market moving up, for those of you think that the stock market moving up is somehow an indication that all is well, reflect for a moment on the fact that ten-year treasuries, just since the dust settled post Brexit, have continued to see their yield decline, now at 1.39 percent. 1.56 was where the dust was settling.
We’re continuing to see traffic flow into ten-year treasuries and everything across the spectrum in terms of the U.S. treasury market, and your more established treasury markets and government bond markets around the world. So, even though central bankers are boosting equity prices, yes, they are encouraging that rampant speculation, you have gold and bonds which are telling you that something is not quite right.
Kevin: Right. If you smell smoke in a theater, Dave, and you start seeing people move to the exits, but the alarms have not gone off, if you smell smoke and you see people starting to leave, you want to be one of the people who are leaving. What you are saying is, the bond markets right now are signaling that there is smoke in the theater, people are leaving the theater. Those who are sitting and continuing to watch the movie are those who are sticking in equities. I hate to say it, but the stock market is fooling a lot of people right now.
David: And where is the smoke coming from? It’s the burning of a social contract. You have trust which has been broken, and more people are waking up to the reality that what we exist in feels like Animal Farm, the classic George Orwell novel, where it’s just a growing realization, the public is realizing that they are not in that lucky porcine class.
Kevin: Well, all animals are created equal, but there are some animals more equal than others. I think that’s what it says, something similar to that.
David: That’s exactly right.
Kevin: Going back to Britain, then, and Brexit. You are seeing the public voting with their feet at this point.
David: And the public is not only voting with their feet politically, but you’ve also got the public which is voting with their pocketbook in the financial market – so bonds, gold, silver. The power players are beginning to react to this, and it should come as no surprise, I think we’ve seen the first significant domino fall in terms of a real world consequence to the cashless society. You have Sweden and their largest gold dealer – their doors were not closed this last week, but they did notify everyone that their operations would be tremendously challenged since the Swedish banks had closed all of their accounts.
Why did the Swedish banks close these dealers’ accounts? Because in Sweden they’ve made the decision that trading in bank notes – this gold dealer also deals in bank notes – because the trade of bank notes is anachronistic, a thing of the past, we don’t need companies like this operating at all. So, they’re not being asked to close down, and the Swedish government isn’t closing down the gold trade…
Kevin: They just took their accounts and shut them down.
David: That’s right. So, how do you transact business if you can’t receive wires or clear checks? So now, they’re doing what they can do, which is conducting business through an Estonian bank.
Kevin: Right. This is the paper world fighting the real world.
David: It’s the paper world fighting the real world, that’s exactly right. And again, it’s Swedish banks which are very much in line with political preferences, and they are moving away from the exchange of bills, moving away from the free exchange of money for metals. And for the first time, whether the Swedes know it or not, the window of opportunity is closing to own and trade in the white market, gold, and presumably silver. But one step beyond that, even something more common, mundane, and normal to today’s, not investor, but the person who buys groceries, pays bills, etc. – cash in your pocket – gone, irrelevant.
With the Swedish bank moving to eliminate cash altogether, those who deal in gold or cash are now being pressured out. This casts a long shadow, not only across Europe, but I think into the United States, as well. Probably a long time coming before we see it as a threat here in the United States, but you need to remember the window of purchasing gold on the open market, in the free market, in the white market, is something that won’t last forever. It has a limited timeframe.
Kevin: Dave, the other day I was up at the pool north of town, and I was doing a transaction – I can’t remember what it was for, but I handed him cash – and this is a generational thing, but this young man looked at me and he said, “Aren’t you looking forward to the day that we don’t have to do this, when you can just put a card through, or what have you, and we really don’t have to deal with cash anymore?” He had to count the cash back. It hit me, and struck me, that really, the generation that is alive right now, the younger generations, maybe a couple of generations, are used to doing PayPal transactions, they’re used to doing credit card transactions, debit card transactions. Cash is really becoming a thing of the past for them, and they don’t really see a problem with it, either.
David: My wife had a communist professor at Boston College – a fascinating guy. He was so against anything that smacked of the capitalist system – there is some irony here (laughs) – that he refused to have a driver’s license, he refused to have a credit card, he refused to do anything other than walk or ride his bike to school where he taught at Boston College. He was a man completely outside the system. He was constantly fighting with the college as to how to be paid for his services rendered, being a professor.
Kevin: How did he want to get paid?
David: He didn’t want anything going to his bank because to have a bank account would be to be a part of the system, and he didn’t want to do that. He wanted to be a guy paying cash for rent, paying cash for groceries. It was just interesting because his political ideals lined up with an anti-capitalist bent, but it was an interesting thing – he didn’t want anything to do with the system, and yet now we have the conveniences of the system, which as you described with this young man, are sort of at the opposite end of things. Rather than being concerned that the system will ultimately control you, we have folks who are saying, “I’m more than happy to be controlled because of the convenience factor.”
Kevin: Sure, let me yield.
David: Again, going back to Tavex and Sweden, you have changes which are taking place in the banking sphere. Those are being pressured by changes in the sphere of money, and what money is defined as in the modern era. And then ultimately, you have the cashless society dynamics which are afoot because you have an audience of people who are willing to say, “We like the convenience.” And so what is the single variable that guarantees a cashless society, whether it is in Europe, or here in the United States? It’s the death of the geezer. And I say this with all due respect to anyone of a particular age which you might categorically be considered a geezer by a younger generation.
And I say this will all due respect to the last luddite, and that may be me, but when the last luddite passes away, it’s the compelling nature of an entirely debit and credit system that is not going to be challenged, it’s not going to be protested. There is just a simple answer to a very simple question. “Sir, how would you like to receive your rebate?” And there is something so appealing about being in the system, lock, stock and barrel, having everything in the system. Transactional simplicity, the speed that comes with that. It draws the next generation into a system where all of your cards are on the table.
One of the things that that neglects is the history of what power does to people. We know what was said. “Power corrupts. Absolute power corrupts absolutely.” That is power in the minds of the people who have it. That goes back to Book II in Plato’s Republic where he talks about the Ring of Gyges and having power ultimately corrupts character and causes people to do horrendous things. We’re talking about what power does to you, being at the receiving end of power. You would not readily give up control or put all of your cards on the table if you were a student of history. Why? Because you know what power does to the people subject to it.
Kevin: The fact that we still have choice with what we do with our money is actually what keeps this power system in check. I can go down and pull money out of the bank right now, the way things are. If the bank doesn’t pay me the way I want it paid, or if the bank is not safe. There are any number of reasons, maybe, why I would pull money out, but I still have that option.
I think it’s not just the privacy aspect that we’re talking about with cash, but the real element is, you don’t have the power of choice. And so, these negative interest rates – let’s say that an economy gets to the point where it says, “We’re going to pay you negative interest rates, which like we’ve talked about before, you give somebody $100 today and in ten years you get $90 back. Why would I do that? If I have no choice, that’s why I would do that.
David: As we discussed last year, a good six months ago when Ken Rogoff was writing his papers about how we really should think of moving to a cashless society if we’re going to enforce negative interest rates, and at a practical level, you can’t enforce negative interest rates indefinitely if you still have cash. You give people the ability to opt out. What we’re harkening back to is a different timeframe altogether where there is a question which precedes cash, which is, why do we have confidence in cash and the printers of money in the first place? Which gets to the basics of why we value gold and silver in a portfolio as something of a stabilizer.
Again, I think you’re seeing a migration. This is the front edge of a mass migration of investors who ask the same question. What is the nature of money, and do we trust the established powers that tell us exactly what we should believe about the nature of money and how the system will operate, and how we will fit into the system as a cog in the wheel? There are a number of people who resent those presumptions, and will, as they have already begun to do, migrate into assets that given them flexibility, freedom, privacy, and an opt-out, while they can.
Why do I say you’re seeing it now? Last week we talked about the Dow-gold ratio and how it reflects value, swinging from paper assets where there is generally confidence and greed, to periods of time when there is a greater sense of fear and a lack of trust in the marketplace, and people prefer gold in those environments. It has always been this way, and the ratio, if you’re drawing a chart of that ratio, reflects the radical swings of market sentiment from greed to fear, greed to fear, where people prefer paper assets on one end of the spectrum where greed reins, and when fear is dominant, yes, gold is preferred. The other ratio which I think is very important and tells you a lot about who is buying what and why, is the gold-silver ratio.
Kevin: Right. How many ounces of silver does an ounce of gold buy?
David: That’s right. And you’ve seen that ratio move from its extreme in the high 70s at the beginning of this year. Over the weekend it traded to 64, the holiday weekend, July 4th, of course, our markets were closed here, but as you watched in Asia and in Europe, as we tend to do, in the wee hours of the morning it traded to an interim low of 64-to-1. Now, we’ve gone from the high 70s to 64, and what that indicates is that there is a growing audience of people who want the metals. It also indicates, when silver begins to out-perform gold – remember, in March, gold was moving, and silver was following, silver was following tepidly, it was following very cautiously.
And so you had a 25-30% move in the price of gold but maybe an 18-20% move in the price of silver. Now, silver is eclipsing gold, and it is suggesting two things. One, that there is a larger audience that is a more popular audience of people who want to own something that they can afford.
Kevin: More man-on-the-street buying.
David: That’s exactly right – poor man’s gold. And silver, in that category, represents a metals option on steroids. It tends to move faster, it’s an even smaller market than gold, but the shift from the high 70s to 64-to-1 over the weekend, also suggests that there is a growing awareness of the inflationary consequences of central bank policy.
Kevin: Right. Because the white metals, whether it’s silver, platinum, or palladium, usually start showing their muster when you have inflation hidden in the system.
David: That’s right. So to the degree that deflation is the obvious outcome, your white metals suffer. To the degree that a sentiment change begins to occur, you will see the white metals out-perform. So, the low value of platinum relative to gold may represent an opportunity. Now, the low value of silver relative to gold may represent an opportunity. Now, and as that changes, what can we see? If you go back to the timeframe 2010-2011, silver started really moving, and the gold-silver ratio declined to 31-to-1.
Kevin: Which is pretty close to the 200-year average.
David: That’s right.
Kevin: 30 or 31-to-1 is the 200-year average. You are always safe buying silver if it’s 70 or 80-to-1.
David: That’s right. And you’re always safe selling silver if it’s lower than its average, in the 30s, 20s, even teens.
Kevin: And maybe swapping back into gold.
David: That’s right. So, you look at that ratio, and what is it telling you? It’s telling you that the audience is growing. It’s telling you there is a growing confidence that the outcomes are going to be driven by central bank desperation. And how does that spell out in the financial markets? Quite frankly, what we suggested a few weeks ago, that our version of a contemporary Havenstein, whether it is Yellen, or Stanley Fisher, or Mark Carney at the Bank of England, or Mario Draghi at the European Central Bank.
Kevin: Anybody who is easy money.
David: That’s right. If you’re from the easy money crowd, you’re contributing to one of the great inflations, potentially, and it’s ironic because we’re fighting deflation. But what are the consequences when you lower rates to zero, and then less than zero? You may just be surprised by how people react. This is going back to Brexit and our conversation today, more broadly and philosophically, it’s people acting in ways that the establishment and academics couldn’t really anticipate because they are so removed from the people.
Kevin: The bad news is always good news on the stock market. That has been the theme here this last few years. People who are watching financial news are actually hoping that the Federal Reserve will come out and say, “Hey, things are just not that good,” because they understand that that translates to free money. That’s the whole easy money. Now, it’s strange, the establishment seems to sort of like putting out little bad news snippets to cause asset prices to rise in the equities market, the stock market. They don’t care for it so much when you start seeing silver rising on the same reasoning.
David: That’s right. Silver and gold have always been a threat to the system. Volcker, in his memoirs, was reflecting on the fact that he didn’t just hammer the gold price to sort of break the barometer, so to say. And why would anyone in a position of power want to break the barometer? Because you’re trying to control public sentiment and control behavioral outcomes by not only the political hoi-polloi, but you’re also trying to influence the behavior of your average investor, as well. I think one of the issues that we see emerging in Sweden reminds us of is the importance of a transition back to traditional assets. As much as gold and silver are a port in the storm, there does come a point in time where they may enter the crosshairs in a way that is very unfavorable to investors.
Kevin: Well, the elites are going to tell you that it’s almost criminal to own. That’s how they operate. That’s what happened with Sweden. So, a person is going to have to be willing to swim against the stream of whatever the propaganda is at the time.
David: It makes me think of spaghetti and meatballs. We made an amazing dish over the weekend. Somebody here in the office had given me some meat and I turned it into meatballs, and they were delicious. Our kids – it was like a feeding frenzy. And I’m thinking to myself, “Okay, well, it was a good meal.” Well, did you know that spaghetti and meatballs are occasionally eaten by Sicilian mobsters?
Kevin: Hmm. So what were you doing? Are you a Sicilian mobster?
David: I was corrupting the youth, of course. That’s what eating spaghetti and meatballs implies. Anyone who eats at the Spaghetti Factory, or maybe it’s Magiano’s or the Macaroni Grill, but did you realize that you’re swimming with the dirtiest of the dirtiest in the global society? And quite frankly, spaghetti and meatballs and the Sicilian mafia, that’s like transacting groceries and paying cash for it, or owning metals – it’s going to be categorized as dirty.
Kevin: Don’t you know that’s dangerously criminal, or close to criminal?
David: It’s dangerously criminal. And look – here are two people that we know who have done it, therefore the whole world should change their behavioral mode and we should view this as criminal behavior because we found two people, right? And there are bad people, I promise you, there are bad people who eat spaghetti and meatballs. There are also bad people who eat sushi. There are also bad people who eat rice, and corn.
Kevin: And there are bad people who use Bitcoin, and bad people who pay with cash.
David: (laughs)
Kevin: You know, Ken Rogoff even brought that up in his report, eight or nine months ago.
David: He did. He said the primary reason why we need to do away with cash is because of the vast amounts of criminal activity which is conducted with cash.
Kevin: You can hear the argument right now, and you can see why a lot of people are going to buy into something like that.
David: Last week when we were talking about the Dow-gold ratio, understand that there is something very strategic in owning gold today, but there is also something very strategic in letting someone else own a part of your gold tomorrow, right? So I think, as you consider transitioning from gold to other assets, you need to consider doing it because as the price of gold increases, it is going to end up with a target on it, a set of crosshairs on it. What is the number at which it becomes a political target? Is it $2,000 an ounce? I think you’re still in the world of obscure. Is it $3,000 an ounce? I think you’re still very obscure.
Kevin: But when it’s running to $5,000, $8,000, $10,000 an ounce, they’re going to notice that, Dave.
David: I think you need to decide what ounces will be kept intergenerationally on a very private basis, in a cigar box or a shoebox in a corner of a closet, and the rest, I think, you need to re-deploy into other assets. The value of that particular ratio, the Dow-gold ratio, is not just as a suggestion of an exit strategy, but is also letting you know when the profile of the metal is such that those in the paper asset world and those who are a part of the Wall Street elite are begging for some sort of relief, are begging for some sort of scapegoat, if you will, what is the cause, what is the problem, what is the solution that we propose? It wouldn’t surprise me if it is not something like the Swedes to say, “We know what the problem is. It’s cash and gold. We know what the solution is. It’s a cashless society. And we’re here to help.”
Kevin: But for now, own gold.
