Podcast: Play in new window
- Gold & Silver Bull Market Intact After Violent Volatility
- 6 Years Of Silver Deficit Point To Higher Price
- Central Banks Are Net Buyers Of Gold
“The experience of this last week, people think volatility is their enemy. It’s not. Volatility is your friend. This is the nature of ratios. It is a measure of volatility between two assets, and it’s telling you when something is overvalued or undervalued. And in the 40s, silver, relative to gold, is getting overvalued, which is why we shift to the undervalued asset. You’re taking risk off of the table and at the same time you’re able to compound ounces, but you can’t compound ounces without volatility in the ratio.” – David McAlvany
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Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick along with David McAlvany.
Well, David, it never fails. I don’t go out of town that often, but I was in Boston last week and I saw what happened to the market. But to be honest with you, it was nice to be in Boston during that volatility.
David: Well, I think the last time we had significant market volatility, you had gone fishing.
Kevin: Lake Powell, 2013. Yeah, don’t remind me. I get twitchy on that one. But go back to Boston.
David: We all get twitchy when you’ve got volatility. I get it. I get it. Anyone who’s been in the markets for any period of time at all, there’s battle scars, a little PTSD.
Kevin: But while I was there, I was learning so much history, and Paul Revere, being a silversmith, going through the various museums and realizing that wealth back in the 1700s was fashioned into silverware. It was fashioned into cups. It was fashioned into many things just so that they could hold on to their wealth. But you had solid gold cups, spoons, you had a lot of silver, obviously beautiful silver from Paul Revere. But we look back and it’s not just to be opulent. It actually was a store of wealth, and that’s how it was treated.
David: Well, sure. We’ve got the history of not being worth a Continental, right?
Kevin: That’s right.
David: You go through periods of inflation and people want to own something real. Last week I asked, how long does this continue?
Kevin: Yeah, the drop.
David: Was it merely a question about gold and silver prices rising? Because when we recorded last week, we were still in the triple digits. And my response was, “Well, the question is one of global dysfunction and policy dysfunction.” And you can categorize policy dysfunction in many ways, monetary policy, fiscal policy, international relations, domestic political policy objectives. These catalysts for dysfunction and uncertainty were not resolved on Friday, January 30th, with a downside whoosh. As tempting as it might be to call a top, that was not it.
Kevin: And we were uncomfortable, Dave. We were talking about it. We were seeing a vertical rise on both gold and silver with no correction. And obviously, a part of that had to do with the people who were buying it. Central banks don’t necessarily sell to speculate.
David: And it’s not the price we’re concerned about. It’s the pace. 65% in one month—
Kevin: Rate of change.
David: —that’s ultimately not sustainable. That does not mean that the market is over just because you’ve got a correction and the market now finding its feet. So gold and silver have and they continue to register a no confidence vote. As far as I can tell, the motivating factors for a no confidence vote remain firmly in place, market volatility notwithstanding.
Kevin: But many of our listeners, including myself, to be honest with you, would ask how long does this continue and how far does it go down?
David: Yeah. Clearly with a violent move lower on Friday and Monday, we can pause and ask the question, how long does it continue, this up move? Is the bull market, so recently catapulted into public attention, over in a matter of months? I think not. Do recall that the speed, the pace of ascent was really the concern last week. And the pace of ascent really only picked up steam in November.
Kevin: Right. It’s been a strong bull market, but it started to go straight up parabolic.
David: But bull markets last an extended period of time. So November to January, it hardly captures it. So is it possible that a powerful market move driven by global macro fundamentals and compelled by growing consensus that US dollar hegemony is going to be retired, have such structural changes ever concluded in such a short period of time? Not ever, not ever. Now granted, monetary regime change doesn’t happen often. So we don’t have many historical periods to compare to.
Kevin: Well, you talked about not worth the Continental, and being around Boston where that really was the spark that started the American Revolution, but that spark actually had to do with being under the thumb of a government that couldn’t pay its war debt.
They had gotten to the point where they were taxing without representation, and not worth a Continental, let’s face it, King George was doing something to colonists that they didn’t want to have continue. And one of the things that they did was they found their own way. Gold and silver does that sometimes, doesn’t it?
David: Yeah. I recall that the dollar was on its way to a similar scenario where the global community was not interested in our currency. And go back to 1970s when Kissinger and company appealed to OPEC and the Saudis and extended the life of dollar hegemony past the Bretton Woods system via the petrodollar recycling commitment, where any oil traded globally was going to settle in dollars. That created a natural demand for something that had a growing supply, a disturbingly growing supply.
So to whom is that appeal made now? We don’t go back to OPEC, and we can’t go back to the Chinese. We had the trade dollar recycling, buying lots of cheap Chinese goods, and the Chinese taking those currency units, US dollars instead of inflating the value of the currency and currency translation. They maintained trade competitive advantage, keeping their currency low, by turning it back into US Treasuries, US dollar assets.
Kevin: Yeah. Well, the question, how do you close the gold window in August of 1971 without the dollar failing? The answer to the question is just what you talked about, the petrodollar. Well, you just make sure that all oil is traded in dollars, but that started going away, especially in 2022 when Ukraine was invaded and we basically told Russia they couldn’t sell their oil in dollars.
David: Yeah. I see the gathering throng of precious metals investors continuing for as long as uncertainty is fed by dysfunction and is fed by dereliction of duty. That’s not an isolated critique of US leadership. Seeing no event or transformational shift in the thinking of global leaders, I remain compelled to treat precious metals as the lifeboat necessary to move from imperiled assets—bonds, stocks, and fiat—to safety and to solid ground. These assets are indeed, I think, imperiled by the reversal of unsustainable financial structuring.
Kevin: And we’re not talking, necessarily, about the mass markets buying gold right now. What we’re talking about, last week, strong hands. These are people who buy gold for other reasons than speculating on price.
David: Yeah. And the price moves here and there, less important. Reading HAI over the weekend—that’s Hard Asset Insights that Morgan Lewis puts together for us—I agree that the secular changes afoot on a global basis in the compound spheres of trade and capital allocation and reserve asset management, those remain firmly entrenched.
These changes are of a nature that one strong push up in the metals market and one strong pull down in price, that’s not sufficient evidence of institutional reform, of bureaucratic sobriety, or a reset that cures the policy ills layered in over multiple generations.
Kevin: Yeah. Well, again, when you’re not working with short-term traders, it’s sometimes hard to use the charts. But the charts are still saying that we’re in a bull market, are they not?
David: Yeah. There are actors and agents that have so debauched our financial markets, and wittingly or not traded short-term expediency for long-term stability. And that’s a part of the nature of democracy. We’ve explored that with previous guests, but such shortsighted recklessness, that sets the stage for a comeuppance the likes of which we haven’t seen in decades and perhaps ever.
Kevin: And you’re talking about this irresponsibility. It has to do with printing money and credit, right? That’s really what causes this and—
David: To accommodate promises that you really cannot afford to make.
Kevin: And so when the announcement was made of Trump’s pick for the Federal Reserve, Kevin Warsh, the aspect that hit all of a sudden was, “Okay, everybody else is irresponsible, but Kevin Warsh is going to be responsible and he’s going to be a hawk.” Nobody can step in there at this point and raise interest rates, can they?
David: Yeah, the mechanics of raising rates in an environment where you’ve got growing towards $40 trillion in debt, not really possible. The idea that he is somehow hawkish, we can all be settled in our minds that’s not the case. His former colleagues, employees at Bridgewater, working with Ray Dalio for years, not the case. It’s just simply not the case.
Kevin: Well, Trump’s not going to put a guy in there that’s going to cause a recession. Let’s just face it.
David: No. In fact, the idea that he would be more hawkish and that somehow would be why Trump picked him is at direct odds with everything that Trump has been asking. And yet the market somehow is triggered by this notion that we’re in a new regime with new leadership at the Fed. And money and credit, these are basic inputs in the modern economy. And in fact, so basic we hardly think of them day in and day out.
When there’s too much of them, again, we think nothing of it. We benefit from the buoyancy that money and credit—in massive quantities—add to asset values the world over. And we just think that that’s normal. Asset prices go up. Well, actually, they do when there’s excess liquidity. And liquidity, like a rising tide, it lifts all boats. We take, just like we take money and credit for granted, we take liquidity for granted. And we attribute to ourselves and to our brilliance the results that it brings, which is a bull market in all things.
Kevin: And the ability to borrow. That’s the credit side.
David: Yeah. We forget there’s a dark side to credit. Credit ebbs and flows. And if you forget the reversal of the tide, the current will grab, the current will pull and rip you out to sea.
Kevin: Well, and this is important to know. We have always talked about precious metals being a hedge, like you said, a lifeboat. You’re not impressed with the momentum as far as it being a short-term trade.
David: I’m not bullish on precious metals because of momentum or because of short-term gains. I remain bullish on metals because I see dysfunction multiplying on an exponential basis. We’ve often described gold as stupidity insurance. I’m bullish on metals because the cycle of greed has run its course, and the safe haven appeal of the metals is still in the early days. So as fears press from the subconscious to the conscious mind—and that I think is going to be led by headlines and events and market behaviors which simply illustrate the scope of dysfunction—I think that’s where global investors persist in, frankly, the only opt-out instrument that keeps them liquid and loaded with options.
Kevin: Well, I’ve got to feel, though, the violence of the downturn that we saw on Friday and Monday. It did remind me of that fishing trip in 2013. I’ll never forget it. It’s April 12th, 2013. It was like, oh gosh, I take one day to go fish, and the market moves more than it had moved in years. Being in Boston, though, seeing the same thing, it’s interesting, Dave, how you relax. It didn’t bother me this time. It’s like, yeah, we had a very violent move down, but hasn’t it been a violent move up the last few months?
David: Yeah. You rarely see the violence of a move like we witnessed Friday of last week and Monday of this week, but it’s equally true that we rarely see the violence of a move higher like we captured in late 2025 and in the early weeks of 2026 in these metals, platinum included, near verticality.
Kevin: Yeah. Yeah. And so long term, we still see it going up, but it still hurts a little bit when you see it go down. I mean, nobody likes to lose money.
David: It feels better to make money than to lose money, clearly. I have had both gains and losses and I’ll often go home, share the screen with Mary Catherine, the good, the bad, and the ugly. Calm by nature.
Kevin: Mary Catherine is. Yeah.
David: Yes. Philosophical by training and practice.
Kevin: Right. Boston College, by the way.
David: Yeah. What does it mean if it’s only a paper gain? She’ll ask me. Or the flip side, what does it mean if it’s only a paper loss? The most routine experience I have with deflation in the broadest sense is when my market enthusiasms are tamed by the cold shower of truth and philosophical reflection. And a strange comfort, too, comes from that removed and dispassionate observer. She doesn’t seem to have the same skin in the game that I do, but it’s a reminder. Oh, yeah, that’s right. I mean, part of her strength is in being distanced from the market noise.
Kevin: Well, and that’s good for all of us to do every once in a while. Distance yourself. You have to look at this, though. Even though it is central bank buying as the main buyer right now, or institutional buying, you still have traders in the game that need to make the market go both directions to make money.
David: Yeah. And certainly we’ve gotten to a point where profit taking is normal, and you get above $100 an ounce and there’s not many investors who have cost basis at 20 and 30 who aren’t thinking about having at least one foot out the door. And so “do I take some gains here?” came at a natural time, overstretched from a technical standpoint. But the bottom line is that nothing has changed except that short term traders positioning with short term thinking— I just don’t see that as sufficient to upset long term trades and secular trends. I think not.
Kevin: Right. But you have said that the prices are high but not overbought. Has that changed?
David: I would say high, but not over-owned.
Kevin: Over-owned. Okay.
David: Yeah, because from a technical standpoint, they definitely were overbought. And I see that overbought condition in the charts, certainly through last week. And you can look at a variety of technical indicators that suggest that the majority of that overbought condition has already been resolved.
Kevin: And that’s in the trading markets. When you say overbought or oversold, that’s just the futures markets.
David: Well, no, not even the futures markets. When I’m looking at a chart and I’m looking at relative strength indicators, when I’m looking at momentum indicators, when I’m looking at Bollinger Bands and a variety of metrics that you can impose onto a chart, you can see where things are stretched on the upside.
Kevin: And we were.
David: Yeah, and we were.
Kevin: Yeah.
David: So I see an overbought condition, a stretched price structure in the context of a long-term structural bull market. That was the reality through the end of last week. We’re not stretched in terms of time. Frankly, in terms of the momentum and how momentum is gathering in the market, we’re not stretched there either. I’ve suggested, in the course of this bull market we pass 8,000 an ounce for gold, which implies 200-plus for silver.
Kevin: You’re doing that with the ratio, right?
David: Conservatively assumed gold-silver ratio of about 35 to 1. We’ve seen better numbers than 35. I’m not taking previous best numbers as a benchmark or an expectation level.
Kevin: But $8,000 gold and $200 silver still is within the bands, or the bounds, of reasonable ratio trade.
David: Yeah. I think gold remains in high demand among central bank reserve allocators, and it’s in increasing demand by investors. I don’t think that changes anytime soon. Wall Street has finally crossed the Rubicon of advising allocations to metals, and that trend is in its infancy.
Kevin: Yeah. So the 60-40 that Wall Street has for decades recommended, 60% stocks, 40% bonds— With the new 60-20-20, which makes room for precious metals, there’s an awful lot of money that could come out of equities and bonds that hasn’t even started yet.
David: Right. It’s the investment allocations in coming quarters and years that will be driven by disaffection with equity and bond portfolios, resulting from shifts in the yield curve, destabilization of the underlying currency from portfolios that are inadequately allocated to hard assets in general, to precious metals in particular.
And what are they presently committed to? They’re presently committed to fad-like narratives. The AI thematic is alive and well, but not forever. It’s still that narrative positively colors sentiment, and as that changes I think you’re talking about a significant rethink in terms of capital allocation amongst the generalist investor and on Wall Street. And as I say, that is in its infancy. To hear from Mike Wilson at Morgan Stanley, this is like fourth quarter 2025 coming to the realization that going forward—
Kevin: You’d better have some metals.
David: Right. I mean, again, we’re talking about the beginning of a trend, not the end of a trend.
Kevin: Well, and speaking of trends, okay, we’re talking about a new Federal Reserve chairman, but inflation, the 2% goal on inflation, what does that look like going forward?
David: Yeah. Well, inflation persisting above the 2% target and having higher interest rates is consistent with both inflation trends and, frankly, a massive oversupply of IOUs. I think that’s a part of what drives the capital migration to relative value, including hard assets. So again, you’re thinking conventional allocations, conventional portfolio construction. It’s devoid of a precious metals allocation that is just being introduced. And so why would there be a motivation to make the change? Many people are still completely on autopilot, not considering what has just been presented as an alternative model. So I think it’s when you begin to see headwinds to the bond market, which we have some, but not in extremis, nor do we have real headwinds in the stock market.
Kevin: So don’t be shaken. Don’t be shaken by what happened Friday.
David: No.
Kevin: What happened Monday in the metals is just a readjustment.
David: Yeah, I would not be shaken out of those positions. Whether $71 silver was the low or $4,400 gold is the low, there’s no evidence that this bull market is stillborn. Won’t like to hear this, but the bull market remains intact from a technical perspective, even to $46, $48.
Kevin: On silver.
David: And even to 3,300 on gold. A complete retest of the dual breakout points of those metals at those levels, which would be 100% retracement of the entire move. While that is not probable, again, I’ll say that again: while that is not probable, it is possible, and the bull trend remains intact. So again, I repeat, it’s possible, but very low probability. I would not be out of the metals market with the stakes as high as they are. Anyone with a mind to give attention to macro considerations has to see this through a different light.
Kevin: Well, and I’d like to talk about the different types of declines, Dave, because sometimes there’s a decline that needs to happen. The market’s overplayed itself, it’s done. And then the countertrend declines or rises, depending on the direction of a market, a lot of times can give you confidence that the market is going the other way, right? That the violence of the countertend move—
David: Yeah. The nastiest declines in a market, in any market, come when either a trend has run its course—not the case here, in my opinion—or on a countertrend basis where the long-term trend driven by powerful, driven by secular inputs, it evolves, but can be punctuated by even more breathtaking countertrend moves. And I think it’s reasonable to ask which of the two this is. I asked a series of questions last week about who and to what degree the people you know are already participating in the hard asset bull market.
Kevin: Virtually no one, right?
David: Right. So who is? And to what degree? Have we exhausted the buyers? Because if we were at the end of the market, the answer would be clearly yes. Everyone’s in. It’s the shoeshine boy talking about how much they own. This is, if you go back and if you’ve ever watched the movie The Big Short, there’s one scene in there where he’s visiting Vegas to see just how crazy the real estate market has become. And they take the time to go to a strip joint. And the stripper is talking about how she owns a rental. Oh, no, she owns, what was it? Five rentals. And she owes money on all of them.
Kevin: And he knew.
David: And that’s all they needed to know.
Kevin: Yeah.
David: No income, betting on a very clear and determined future, which is that real estate values will and can only go higher from here. So I don’t think that was a shoeshine boy, but—
Kevin: Well, and the opposite can happen too. My first year here with your family’s company was 1987. And we had that stock market crash in October of 1987. A lot of people were like, “Oh, I’ll never own stocks again.” But the stock market was nowhere near the end of its bull rise.
David: Yeah. The 1987 stock market crash was equally breathtaking. And it was in the context of a long-term structural bull in equities. The market up-trend was complemented by a peak in interest rates, which began in 1982 and began a multi-decade decline. So capital is getting cheaper. That created the opportunity for corporations to refinance their debt, to take the borrowings and increased borrowings and begin a merger and acquisition frenzy.
If you look at the number of companies listed in the early ’80s versus the year 2000, you lost two, three thousand listed companies because of this gobbling up. No surprise in the context of debt getting cheaper and people expanding the debt side of their balance sheet to be able to grow.
Well, there were interruptions. There were sputters. 1987 with a 22% single day derivatives meltdown. And again, nearly derailed numerous times in the ’90s—the most severe episode being Long-Term Capital Management and the Asian financial crisis, that contagion, 1998. But the bull persisted till the major trend was exhausted. So circa 2000, 2002.
Kevin: You were a stockbroker back then.
David: I was cutting my teeth on professional investing at Morgan Stanley. For metals, short-term profit taking and a short-term correction—
Kevin: That’s what this is.
David: —that’s what this is.
Kevin: Okay.
David: Plain and simple. How deep does the correction go? Yeah. Momentum ran hard and fast to the upside, leaving us with month-end gains of 13% in gold and 19% in silver. So even with a correction, you just step back and look, have we made progress this year in the metals? Those are annual gains which are respectable. 13% for gold, 19% for silver. That’s with the—
Kevin: And this is after the correction on Friday.
David: Correct. So well off the 30% and the 65% registered earlier in that week. Downside momentum can take it all back. I would trust the long-term trend and factors driving a global reallocation of capital over short-term profit taking. You’re talking about two very different things going on. One is, again, limited in scope, and one is much more expansive in scope.
Kevin: So when you look at the technical charts, there are ways of measuring about how far you can expect the downturn to be.
David: Yeah. You always want to combine, if you can, a variety of approaches to the market. Last year we had a variety of technical analysts on the program. We had the Elliott Wave guys. We had Michael Oliver. There’s also fundamental analysis.
The folks at CPM Group, Jeff Christian who runs that, he was head of commodity trading for Aron Trading. They got gobbled up by Goldman Sachs and then he launched a research team more than 20 years ago. They produce the best fundamental research on gold, silver, and platinum.
In fact, if you’re really interested in getting to the nitty-gritty of who’s buying and in what quantities, who’s producing and bringing to market, he produces these books. And I encourage you to get them, read them. They’re expensive, but it gives you a very clear view on the fundamentals.
So on the technical side, you can look at Fibonacci retracements, you can look at moving averages, you can look at momentum indicators, you can look at channel lines, support and resistance. And all of those fit a technician’s toolbox.
Kevin: Okay. So that’s the technicals, but on fundamentals, what you’re looking at more is supply and demand and news events.
David: Yeah. And on the technical side, we’ve found our footing. I would have been hesitant on a Saturday, Sunday, or even early Monday to have said where we’re at or where we’re going, because we don’t know if we’re going to find our feet or find our footing. And sure enough, we did. 61.8% correction for gold and silver.
Kevin: That’s the 618, isn’t it—
David: The 618.
Kevin: —from Fibonacci?
David: Yeah. Fibonacci was a famous mathematician, and these are things that technicians and traders are keenly aware of. You have a move, you could have a 25% decline, you could have a 38% decline, you could have a 50% decline, you could have a 68% decline, you might have a 75% decline or 100% retracement of an entire move. All of these things are normal places to correct to. The question is, what’s the behavior at that point? And we have seen, this week, buyers step in at the 61.8% level.
Kevin: It’s like the game of KerPlunk. I don’t know if you remember that when you were a kid, but KerPlunk is where the ball falls and it has different levels that it’ll hit and then it’ll maybe fall further, right?
David: Yeah. 61.8 KerPlunk. There you go.
Kevin: 61.8 KerPlunk.
David: But you’ve got fundamentals of supply and demand, and that’s a totally different way of looking at the markets. And if you ignore the fundamentals, you can be in trouble because the fundamentals can shift away from you and the whole landscape can change.
On the other hand, you can pay so much attention to the fundamentals and not look at price action that you can get in trouble too. So marrying these is really important as a portfolio manager. And from a fundamental perspective, silver in particular, it persists into the sixth year of supply deficits. This is a very healthy fundamental backdrop for silver.
Kevin: Yeah, because there’s plenty of demand.
David: And I mentioned, from a technical perspective we’ve already seen a 61.8% correction of the bull move. Test of the 50-day moving average bounced off at both of those levels on Monday, retested them today. And we’ve been moving higher since.
So not to say we couldn’t see more downside, but what we got in a two-day walloping was effective in taking off overbought conditions and returning measures of enthusiasm to a middle range. What often takes weeks or months, we got that cooling off in days, literally two days.
Kevin: If I had to weigh out what I like better, technicals or fundamentals, I’m more of a fundamental guy. I like to see what are the facts. And so going back to Jeff Christian, because he’s been in the industry forever, when you interviewed him, he went back to the 1970s. What did he have to say about this week?
David: Yeah. I mean, I think what you like about fundamentals is there’s some story to it.
Kevin: Yeah.
David: And it’s not just like a Rorschach test, “Look at a picture and what does it tell you?”
Kevin: That’s true.
David: And I think you want both, if you can get them. Jeff Christian of the CPM Group suggested over the weekend that the selloff is over this week after short term profit taking. And then you take into account Michael Oliver’s spread breakout.
Kevin: And that’s your technician right there.
David: Yeah. He reverses the math, dividing silver by the price of gold, versus what we typically do, gold divided by the price of silver. But using his metric, our first breakout was at about 1.3%. Again, take an ounce of silver divided by the price of gold. What percentage of the gold price does one ounce of silver equal? And 1.3 was the first significant breakout, and then 1.6, again, where silver equals 1.6% of the price of gold.
Kevin: Where are we now?
David: We ran to 2.2%.
Kevin: Okay.
David: And then in this correction, we retested the breakout of 1.6%.
Kevin: So the technician was right.
David: The Rorschach aficionado looks and says, “That’s as good as you get.”
Kevin: That’s beautiful.
David: “That’s as good as you get.” So we’re currently 1.8. So you take 89 and divide by 49.29, 1.8%. That retest is a great setup for the next leg higher. I could reference half a dozen other analysts that agree that investor allocations and indications of interest amongst their clients is growing. And again, they want to add metals to their portfolio. That inclination is on the rise. And now with a healthy pullback, they can do that without feeling like they’re chasing a bullet train. It backed up and it’s letting them on board.
Kevin: Okay. So let’s go back to ratios the way we do it, okay? Which is dividing the price of gold by an ounce of silver. Where’d we get before this correction? Didn’t we get down into the low 40s?
David: Yeah. Intraday, I think it was 43, maybe even 42 and a half.
Kevin: Okay.
David: And when we were pounding the table last week, you need to do something with a gold/silver ratio. You should be exchanging 10 to 15% of your silver for gold. The ratio is insisting that you pay attention and you take action. “Call us.”
Kevin: Yeah.
David: Those were my words last week.
Kevin: Right.
David: Right. We went from, call it, 43:1 on the ratio. That’s Oliver’s 2.2%. He thinks we’ll see 6%, which in our math would be 30:1. Just like the Dow gold ratio at 10:1. 9:1 last week, 10:1 this week. 6:1 is a maybe. 3:1, probably. 1:1, definitely. These are areas where you’re taking action. Not, “Maybe we get there.” But, do you take an action?
Kevin: Definitely take action at 1:1.
David: At 6:1, maybe you’re taking action and sliding ounces to shares. At 3:1, probably. Yes. And at 1:1, definitely. So we’re not done with the cycle. Either in nominal terms, if you want to price gold and silver or you want to price gold versus the stock market, we’re not done with the cycle. In nominal terms, or more importantly to us, if you’re looking for action items, in relative terms, as it relates to the Dow gold ratio, a significant sentiment shift in equities is likely to kick in later this year. Negative sentiment.
Combine the positive sentiment in gold with negative sentiment in equities, now you’re getting both the numerator and denominator both working. Thus far, we’ve only had one working. Gold has gone higher and it has changed considerably this ratio. But we haven’t seen both numerator and denominator where the Dow is also participating.
When the liquidity starts coming from the Dow, you’ve pointed this out, or the bond market— That is new money that the commodities market hasn’t experienced yet.
The experience of this last week, people think volatility is their enemy. It’s not. Volatility is your friend. This is the nature of ratios. It is a measure of volatility between two assets, and it’s telling you when something is overvalued or undervalued. And in the 40s, silver relative to gold is getting overvalued, which is why we shift to the undervalued asset. You’re taking risk off of the table and at the same time you’re able to compound ounces. But you can’t compound ounces without volatility in the ratio.
Kevin: Right. And you’re also comparing two real things. You’re never going back to cash, which is unreal in the long run.
David: But I would say, you can consider going to something else. If I’m turning ounces into acres, I’m turning ounces into square feet—
Kevin: Dow/gold.
David: There are other reasonable asset migrations out of the metals as and when the ratio says, “Now you have a compelling value proposition.”
Kevin: Right.
David: So combine the positive sentiment in gold with negative sentiment in equities. And, I think, there you’re getting towards cycle completion. And again, for gold and silver, we’ve never seen a bull market end with the ratio in the 40s, 50s or 60s. So where are we at? We’re mid-cycle and we just experienced a significant selloff due to profit taking, and now we’re onto the next leg higher. So couple these ratio dynamics with the Bloomberg Commodity Index beginning to outperform the broader market. So again, this is hard assets and commodities, a broad cross section of it.
Kevin: Real things.
David: They’re beginning to find their stride. And this is not the beginning of the end. This is the beginning of the beginning. Is it volatile? Yeah. But this market, in a two steps forward, one step back action, has much further to go.
And I come back to this notion of, if you can help me resolve dysfunction, then I’m going to see the macro backdrop very differently. If you can help me resolve monetary policy dysfunction, fiscal policy dysfunction, international relations dysfunction, domestic political policy dysfunction, you remove the motivating factors for allocating to gold.
Kevin: But the dysfunction still exists.
David: Yeah. Get policymakers to wise up. Isn’t it fair to say you’ve just reduced the need for stupidity insurance? We’re simply not there yet.
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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.
