Podcast: Play in new window
- Gold Will Break To The Upside
- There’s Not Enough Growth To Support The Debt
- Housing Prices To Fall
“Argentina’s stock market, new high. Turkey’s stock market, new high. Pakistan’s market, new high. What do these things have in common? Currencies that are getting filleted. It’s gold in those currencies that has kept the value, not the stock markets. And that is something key that U.S. investors are going to have to learn or they’re going to get filleted.” – Gregory Weldon
Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick along with David McAlvany.
David, a long-time-ago guest. It’s amazing to me that after 17 years we’re looking back and going, “Gosh, that was a long time ago that you talked to Greg Weldon.”
David: The book that he wrote back in 2007, Gold Trading Bootcamp, it was interesting to me. We had him on as a guest, I think it was actually 2009, but this does go back a ways. And it brings some interesting insights into trading, investing the markets in general. Spent some time at Commodity Corporation, a trading outfit on the East Coast, at Princeton, Moore Capital, got to rub shoulders with some interesting people in his day. Whether it was Bruce Kovner or Louis Bacon, Paul Tudor Jones, and the combination of macro thinking and technical analysis and a real open mindedness to connecting a lot of different dots, there are areas where I think we’ve got some sympathies here. We understand what he’s trying to do, might even do it a little bit differently, but really respect the willingness to embrace a lot of different perspectives as you bring together the right patchwork quilt.
Kevin: The other day you texted me and you said, “Kevin, do you know any great drum solos?” And I YouTubed you a couple that I like. You YouTubed me one back, and I think about rhythm in music. It’s interesting to listen to people who think in let’s say 16th notes all the time, 8th notes and 16th notes, they’re just moving. Greg is a guy who thinks in that high speed trading mentality. Just a couple of weeks ago, you talked to a man who was 88 years old who was with the Bank of England, who was thinking very, very long-term. That’s like whole notes or it’s a little different type of thinking.
David: Unique cadence.
Kevin: Yeah. What I like, though, is for the person who’s saying, “All right, come on, Dave, let’s don’t talk about the next 50 years. Let’s talk about maybe the next 24 months,” Greg’s a good guy to listen to because that’s how he trades.
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David: I think it’s been at least 15 years since we last spoke. I read your book back in 2007, 2008 on commodity trading in gold. We talked shortly thereafter.
Yeah, the world has changed a lot, and then in many respects, it’s remained the same, just multiplied. We’re more dependent on credit. The consumer has very little cushion. Real wages are still struggling. Those are a few similarities. On the other hand, a few changes have materialized. The dollar’s less popular today. Our trade partners are running the same scale surpluses and their penchant for recycling into Treasurys has only eroded.
If our conversation was 2008, 2009, national debt was under 10 trillion. Now it’s 35. Budget deficit was 700 billion, now it’s 1.6 [trillion]—and that’s if you like the CBO’s estimates. Probably going to be closer to two. Interest expense was, I don’t know, 300, 350 billion? Now we’re over a trillion. Unemployment was identical to today, which is fascinating. Gregory, what do you see as the similarities and differences from, gosh, it’s been 15 years ago?
Gregory: Well, that’s a good question ’cause we could talk about that for two hours. I would say that the biggest thing that— I always remember somebody that was really brilliant, one of the people in Market Wizards by Jack Schwager—that great book about great traders—was, look, the market’s changed. The market’s evolved, and definitely technology has been a big part of that since I started, which was actually 1984, the Reagan years. But what doesn’t change is human behavior and human nature.
Now, I would caveat that by saying human behavior is changing, and you have a lot of science going on here in terms of what is happening on this planet that is not necessarily Chinese dirty factories, U.S. consumers buying and driving gas-guzzling SUVs, not when the ice shelves on Pluto are melting, not when we are in this orbital cycle of our solar system through the Milky Way where we’re in a place that’s highly electrified. We have a lot of star systems on either side of us, so you see the polarization.
This is science. You have more light hitting the planet right now than you do at any point in this 26,800-year orbit that the solar system goes through in the Milky Way. And there’s reasons for all of that, of course, because you have a lot of celestial activity around us that is sending light here, and that is energy. It’s pure plasma energy. It’s hitting the ionosphere at a rate that is really mathematically mind-boggling.
So what happens? Well, the ionosphere heats up, heats up the planet. You’re also affecting the core of the planet. You’re affecting the crust of the planet. The crust is vibrating at a frequency above 8 Hz. It’s been below eight pretty consistently, and actually has always been linked to the exact heartbeat of the human heart. So when you talk about the frequencies of the planet are actually rising, you talk about the human heartbeat, it’s not changing. People are out of touch. They’re disconnected.
Not only that, but the planet is more electrified and it’s vibrating at a higher frequency, which makes it more unstable, and you have higher volatility at both ends of the spectrum. Tell me you don’t see polarization in everything. From politics to the weather to human behavior, all of it is completely polarized.
And they say with this light hitting the planet, people that in the old school jargon talk about the Age of Enlightenment, this is when things become exposed like alien cover-ups and pedophile rings and all the things, corrupt politicians and the big deep state and all the things. So I think that there’s a lot of evolution since 2008, but when you come to the markets, it’s still fear, greed and hope. So it’s still, human nature still exists in that. Now I would take it all the way back to 1971. That’s really when you got to start this whole thing because it’s a 50-plus year trend that is a bubble of credit creation.
And if you had asked me this question in 2008, I would’ve said you’re going to have a major economic disruption and stocks are going to go sideways to down for the next 10 years and will look like the lost decade that Japan had after 1990.
That didn’t happen, did it? Why? Because when central bankers, and I wrote this in the book, and it still applies today more than ever, when staring into a debt deflation abyss with $310 trillion of credit globally, when you talk about the dollar about to come unglued in terms of seigniorage, in terms of all the things that we’ve enjoyed all these years, this side of the world versus that side of the world where you have OPEC, Russia, China, all coming together, they’re unifying over there. India is involved. Now you’re talking Hungary and the Czech Republic, even factions of the Austrian government.
Xi and Putin have both visited and signed agreements in North Korea for crying out loud. You know they want Taiwan. You know they want South Korea, the picture, it’s right across from all the major Chinese ports. Just look at a map. So you’ll have so much going on here that really threatens that 50-year credit bubble, and that’s the biggest concern. I think where you’re at now is you’ve gotten rates so low during this 40-year downtrend since Volcker, Powell is the Volcker guy. Powell’s done everything he said he was going to do. He’s done it beautifully, to whatever extent. I think the timing has been off a couple of times, but he said in 2018, “We got to get inflation up. We’re going to let it run. We’re going to have no tolerance bans,” meaning, “If it gets to six, we don’t care. We’re not going to stop it anywhere.
It could go as high as it wants, because we know we can raise rates like Volcker did and bring it down even if it means at the expense of economy,” and that’s where they’re at. Now in that big picture, you had the big downtrend in interest rates and in inflation, that is over 40 years now and you violated all that. You can’t go below zero. Europe has proved that that’s folly. It works against the goal of spurring consumption. Basically, when you send a message to everyone that we’re not going to change rates because we think things are going to be so bad for two years, what do people do? They cocoon. So in that context too, you get to where we’re at now, where inflation has come down, but it’s not below target. It’s not going to probably get below target because you have some of these factors now moving back higher.
And I have said all along, it’ll come a point when the Fed is seen as acquiescing to higher general rates of inflation to protect the economy ’cause they can’t allow a debt deflation, and that’s where we are now. And frankly, to tie this all together, and it’s a long answer, but it’s really important because this is the big picture. Yesterday’s comments from Powell on the labor market were big. It was a huge tell. This puts the dollar in play, and now this is the catalyst that we’ve been waiting for, I think, to really take these precious metals markets, what I like to say, we’re going Mandelbaum. If you watch the old sitcom, Seinfeld, Izzy Mandelbaum, the 80-year-old trainer, Lloyd Bridges plays him brilliantly, you always got to train Jerry. And it’s like, “We’re taking it up a notch,” and that’s about to happen here. And I think it’s really right in front of us right now. So it’s a good time after 15 years to reconnect ’cause it’s alignment here of a lot of things.
David: Well, there’s a bunch of things to talk about both on the fundamental side and the technical side. And just to set context, there’s an argument for eminent recession, hard landing, and an argument against it. Happy days are here again, Goldilocks and the rest. Are you in more of the eminent recession camp? What are you looking at to support the position you take today?
Gregory: Well, it’s a great question based on the answer I just gave you because even the opinion on what’s going to happen is as polarized as I’ve ever seen it. This is my 41st year of doing this, and you have even the data is polarized. You have something for the doves, something for the hawks, almost every report. Now I will say the skew is definitely in the last two to three months, really starting end of March through into April, you see in the data the consumer is starting to spit the bit here, and it’s not surprising. Because as you mentioned very eloquently in the opening, look, savings are tapped out. Okay? All that trillions of dollars of money printed has been spent. It’s exhausted. Savings are now below the levels that they were pre-pandemic. Wage growth is nice except it’s not that much higher than inflation. So if you take real wages, it’s not enough to give you the kind of underlying growth you need to support the debt because that’s the big problem going forward.
Are you going to have enough economic growth, and what’s the engine of economic growth going to be? In this case, we’ve seen housing has collapsed. When you talk about existing sales or you talk about new home sales, they violated multi-decade uptrend lines. And in one case of existing home sales, you’re talking about being back down in 1990s levels in some of these indicators. Same with permits, starts and housing completions, all breaking trend lines. Go back to the 2009, 2010 low, the housing crisis low, and we’re breaking that trend line. Now, this sets up a huge reflation in housing in the next round of Fed rate cuts. And I think ultimately there’s going to be great opportunities there, particularly in terms of buying a mortgage-backed securities ETF, stuff like that, right?
But in the meantime, housing is on its back here in the U.S., and demand is now coming off, which is driving some supply. But supply is coming from a lack of sales, not from new inventory being built to whatever extent, so that’s the number one problem, too, in there.
Let’s talk about commercial real estate. We know this is a ticking time bomb. Every time you turn around it’s a story and then it goes away for a while and then it’s a story. It’s here, it’s a story, all right? Even to a degree now you’re talking about some of the other multifamily housing developments, they’re now in a situation of delinquency rates on those payments by the developers, that’s 7%, the highest since 2008. Same with the consumer. The consumer had rolled over 12 months ago. If you look at retail sales relative to inflation, retail sales have been flat to down on a real basis.
And there were several months where the dollar change year over year in sales was fully accounted for by the price change because they don’t take that into account when they figure retail sales. And now retail sales below three year over year is even below the rate of inflation. From that perspective, you see delinquency rates on auto loans and on credit cards rising, and they’re still borrowing. The most recent credit numbers that just came out a decent size number, and what’s happening here is they’re borrowing the most money ever at the highest cost ever to borrow that money. And that doesn’t say, “Oh, we feel good.” That says, “We’re stressed out about paying the bills.”
So I think this is a consumer cocoon coming. You’re seeing it in the data, and the big thing last week—last week was huge, then Powell this week is a one-two punch like Mike Tyson’s going to deliver.
Last week, you had, number one, the ISM service numbers. Horrible numbers. The new orders flip-flopped from a 20% more firms were saying new orders were rising to now more firms are saying they’re falling. That’s been a couple of years since we’ve seen that. The service sector has been the rock of this economy, and that rock just got crushed. And to that degree, too, you see the order backlogs down, and even the comments are really negative all of a sudden.
And so the service sector, which has been the source of strength, is now really crumbling. Then on Friday, I tell you, three, four or five months now of labor market numbers that were polarized, you have the one survey, you have the other survey, the other survey that shows a really bad backdrop. All the jobs being created are part-time. That was particularly true a week ago Friday’s report. Within that same context, you talk about all the real disruptions and the people that have dropped out and the household numbers which show the rise in unemployment, the number of people receiving benefits from the other source of labor market data showed a new high there too. And another big jump, highest since the pandemic.
So the labor market is now coming under pressure. So you have the entire academy now under pressure. So yeah, I would say you’re at the beginning of a recession right now, and I think Powell acknowledging multiple months—and he used the word like for the past couple of months that the labor market has gotten dicey. Look at the total unemployment rate. It’s up 70 basis points from last year. It’s up 50 basis points this year and it’s 7.7 on an unadjusted basis. That’s got to be saying something to the Fed. And I think the comments from Powell yesterday really set it up. What he basically said is the economic risk is just as big now as the inflation risk, and we may have to react to the economic risk.
You get a minus sign on the headline non-farm payroll in the next two reports before the September meeting, they’ll be cutting rates in September. The problem is, you’re priced out all the way to 4% by the end of the next year. So that’s a problem for the stock market, potentially.
David: So we’ve got some things that are on the edge economically, yet financial conditions are extremely loose. That feeds bubble dynamics. Do you anticipate a change in those dynamics?
Gregory: Well, I think that’s kind of what’s going on now. You can really measure it a couple of different ways because again, it’s polarized. When you talk about the Fed’s policy, it’s tight and they’re actually tightening. If you look at the fed funds rate of five and a half, let’s call it the top end, we’ll use five and a half, inflation on PC is below three. That means your real fed funds rate is 2.50, maybe 3%. That is punitively tight when you’re talking about R-star, the whole big studies they did, 311 pages of white paper they wrote in 2018. I read every page. R-star defined what neutral rate. We’re going to let inflation run with no tolerance bands and then we’ll bring it back down by raising rates. Everything they did was in those papers exactly, but in that context, where they are now from a monetary policy rate perspective is punitively tight into an economy that is clearly rolling over. At worst, they should be neutral, which you could argue would be 4%. At the same time, okay, you have a roll-off of the QT. It’s still 1.1 trillion on a rolling twelve-month basis. I mean, it’s not like they have stopped QT. They just lessened it a little bit from a record rate of minus 1.3 and a half trillion dollars on a twelve-month rolling basis. So QT is actually tightening conditions in the bond market. And I think that was some of the hiccup you saw in the bonds just recently too. On the other hand, you could say that monetary conditions you could argue are really loose. And how would you define that?
I would define it very simply. The gold adjusted value of the dollar is within a couple of percent of the pandemic low, which would put it at a 13-year low. And I measure monetary conditions by the value of the dollar adjusted by the price of gold. It’s really simple. Use an ounce of gold to measure the purchasing power and the change in the purchasing power of the currency. And by that measure, you could argue, and I’m not saying this, but you could argue that the rate of inflation is 18%. Why? Because the dollar relative to gold is down 18% over the last 12 months. When the dollar breaks for real, which I think is just on the horizon here, that’s when you’re going to see the fireworks in the metals. And I think we’re on the cusp of seeing that.
David: Coming back to financial conditions, thinking of investment grade spreads, high yield spreads, even CDS, the CDS markets would indicate such calm, such peace. I guess that’s what I think of when I think of the broad financial markets and extremely loose conditions. There’s no concern, there’s no pricing in of risk. Whether it’s the MOVE index, the VIX index, pick it, the indicators would suggest everyone thinks we get smooth sailing ahead and yet the way you describe the economy may not be as smooth as anticipated. And in the financial markets, perhaps there’s some surprise around the corner too. I want to look at a couple of charts and just open this up. What charts do you find most interesting right now in the commodity space? And then I want to look at currencies and equities too.
Gregory: Let me address what you just said because that’s a really good point that you bring up about the credit spreads and the CDS and all this kind of stuff. I mean, Powell actually mentioned that. If you look in the Fed minutes rather, it was mentioned, where the Fed’s looking at that and saying that the markets agree with our policy. So part of me says they really don’t want to start to cut rates until they get disinflation in the equity market, in the asset market. They see some signs of distress in the ways that you said. So that’s a really interesting point that I think is worthy of discussion as well. So I just want to mention that. In terms of the charts, I mean the most compelling chart to me right now is the one I just mentioned, which is the dollar index divided by gold.
It’s a simple ratio spread. It gives us a gold adjusted value of the dollar, and I like to look at that rate of change. So that’s one of the more interesting charts to me right now. I would say there’s some bond market charts that look interesting because here again, you have such polarized markets, you got some currencies like the Taiwan dollar’s on the verge of a major breakdown. You have other currencies like say the Norwegian krone for example. I mean on the verge of potential major breakout. And it depends, there’s a lot of backdrop that’s different from these countries based on how high inflation went, how aggressively the central bank was in fighting it, and then how much room they have to cut rates here, which is those currencies are the ones that benefit. So I think when I look at something like that, I look at the yield spreads and I look at something like the Norwegian or the Swedish against the US. You can certainly see, first of all, those curves are moving towards a positive slope and potential steepening.
That seems to be kind of a global trend that’s starting to emerge. That’s number one. Those charts. And how that then plays in with the rate dips against the dollar where the dollar has had this huge interest rate premium that is now shrinking even against the yen. And this is really interesting to me because the yen, gosh, nobody wants the yen, the yen is worthless, so on and so forth. You’re talking about a place where retail sales have been above 3% year over year for 26 consecutive months. That’s never happened in Japan since the 1980s. You’re talking about inflation rate that’s two-ish, two and a half-ish, but how long have you wanted an inflation rate of two and a half in Japan when the ten-year bond is still like 1.10? So when I start to look at things like that, and then I look at the yield differential, which has completely diverged from the yen just in the last two or three months.
We’ve seen this happen on two other occasions, and both times the yen skyrocketed and readjusted towards the rate differential. Certainly there are a lot of other things going on with Japan, but when you talk about the largest holder of US Treasury securities, 1.1 trillion, China’s dumped half their Treasury securities, taken the dollars and bought gold. So that’s a whole ‘nother story and there’s a whole ‘nother topic. But in terms of Japan, this story made the rounds, and I actually talked about it maybe two weeks ago, and all of a sudden people are all over this story and then nothing happened. But this is a real possibility where they have inflation rising, and it’s arising kind of for its own reasons. One of which of course is the decline in the yen, which has been unprecedented in terms of how many months in a row the yen has been down on a year-over-year basis.
This goes back to 2021. So in that case, that’s been part of the inflation. Well, if you want to fight the inflation without seeming like you’re tightening, because Japan is still very fragile with all their debt, one way to do it would be to sell Treasury bonds, convert the proceeds into yen, and by default you’re intervening in the currency. So I think the yen right now is really undervalued relative to what could happen. So I’m looking at some of those charts and I find them really interesting. There’s a lot of commodity charts that I find interesting. I think natural gas is a really interesting chart. We’ve been involved in cocoa earlier this year, which has come back, but we’re looking for another place to buy it and the most recent one that has taken off that we caught really well has been coffee, which all of a sudden is perking back up again, percolating, I guess I should say.
That’s some of the charts we’re looking at, but gosh, there’s so many good charts every single day. It’s part of what I really love about doing this is pattern recognition, finding good charts, seeing breakouts that no one else is seeing, that kind of thing. I’ll tell you another chart just as more up your alley too, by the way, and maybe jumping a gun to our next discussion, but Newmont Mining has been an underperformer. And I said, “Look, you’ve had the juniors and some of the smaller stocks that really perform well, and it’s kind of backwards in the timeline of the way these things usually work for the past 40 years that I’ve been doing this.” But there’s reasons for that in terms of Newmont, who’s accumulated gold. The other companies that have gold underground that are not even bringing it out of the ground, they can do it more efficiently, but this is almost like they’re buying gold that’s underground to some extent, and that creates a little debt burden, so on and so forth.
So I think that’s part of the reason they’ve underperformed with some other outside factors. But in that context, when all of a sudden that gold in the ground starts to get more valuable because gold’s on a tear, which I think is about to happen, then all of a sudden you start to see these big cap blue chip behemoths, the benchmarks really start to come alive. Anglo is in that camp and Barrick is kind of pulling up the rear, but the action in Newmont to me is telling that again, we’re about to go Mandelbaum, that the exuberance for these metals— I mean, think about this, who is rotated out of stocks into gold or who has rotated out of high-tech or consumer discretionary into gold? Nobody.
David: Nobody. Nobody.
Gregory: You lost the ETF crowd, you lost the coin crowd. And open interest in gold on the futures market is still very low historically, and it’s not even that high in the near term. The purchasing power that could flow into this market, something that we’ve talked about for 20 years, could finally be materializing where it kind of overwhelms the market. And look at where cocoa went, and then start to think, what if gold catches a bit like that? What if it’s just money flowing in? How high could gold go? It could be really spectacular. And I was asking the question the other day because to me silver looks really good here, was, well, it’s not like can silver get to 50. And you know me, I don’t like to exaggerate. I don’t like to be all one way or this exuberant myself. I’m just calling it like I see it, but the question I’m asking is not as can silver get to 50, it’s how fast will silver go to 50?
David: One of the things you wrote about back in 2007-08 in Gold Trading Boot Camp is you look for fundamentals, you review the fundamentals and then you look for technical validation. And it sounds like that’s kind of what you’ve established on the fundamental side for the metals. What would you see as technical validation for either gold or silver or the platinum group metals? Where would you say, as a technician, yep, that’s it, we’re off and running?
Gregory: Yeah, good question. Gold’s already done it. So I think the next wave in gold has started. If you look at a monthly only chart, if gold closes above, I think it’s— Don’t kill me if I’m wrong in this. I think it’s 2336 was the June monthly close, and that’s basically the front month futures contract on a continuation basis on a monthly chart. You will close higher for every month in this year, six months in a row, gold will close higher on the monthly close only. That’s never happened before. I went back and looked at every single— I mean, I went back and did this for an hour and a half, never happened before. Five is the most ever we’ve seen. So right now it’s tied for the record. But if you then start to look at the rate of change and the way the markets went in the ’70s or when the Washington Accord hit in ’99 through 2011, and you kind of look at those legs of bull market gold, it suggests you’re really early here.
And I don’t like to do upside targets because that suggests I’m willing to get out there, and people criticize me, “What’s your target on that?” And it’s like, “I don’t have one.” It’s like, “Oh, how can you do this for so long and not have a target?” It’s like, “Why? Because I don’t have no idea how high this could go and I don’t want to limit myself.” It’s like Limitless, that movie. It’s like take a pill and just let it run, man. Because that’s how you make the most money is you get out because you think it’s overcooked or because this was your target. That to me is just a backwards way to do it. Having said that, of course, I’m a mathematician. I like Fibonacci’s. I like Elliott Wave. I don’t adhere to any one single thing. I want everything. From the top down fundamentals to the bottom-up technicals, throw to quant, throw to psychological, which is positions and people’s hope, greed and fear, and I want all that to gel.
In terms of gold, again, if this is what I think it is, because I kind of look at it in one to three year terms and then let’s say 10-year terms, the ten-year thing on gold, I just did the math yesterday, believe it or not, it gets you to 4945 within the next 10 years. And that’s the highest projection of anything I’ve ever had. But the fact that gold could close six months in a row here, something that’s never happened, tells me technically that’s there. Silver on the other hand needs to get above $32 and stay there for a week or two, then we’ll see. The thing is, if it gets above there, it may go right to 50. Platinum has its upside breakouts that are not far away. I think palladium may have bottomed, but I actually bought some palladium last week. It’s a very thin market, so I don’t recommend that for everybody.
So I think the PGMs, and if you’re looking at some of the PGM mining shares, particularly in South Africa, they look very bottomy, they’re really cheap. It’s like a call option on platinum. And I think when you’re talking about still a $1,400 discount to gold, I like it. So I want to see it technically prove itself. I think the breakout is around 1110 from platinum.
I think copper has done its correction and is ready to take off. You got a major supply side issue there. That’s not going away. So you’ve seen a rise in inventories, but you’re still historically low. And I just think the demand side of that and the way China controls some of these commodities, let’s not forget, we’re in a world war already. It’s a resource and commodity war with that side of the world. They hold all the weapons, so China’s hoarding copper, they’re hoarding wheat, they’re hoarding all kinds of things. And so this will be another disruptive factor you have to keep in mind going forward.
David: I think you missed a couple of things earlier in terms of what’s changing in the planet. You didn’t mention cow farts and internal combustion engines as the major contributors to global change. I say that kind of joking because there is this move towards copper as the world says, “Hey, we got to deal with hottest temperatures, et cetera, et cetera. If we don’t electrify, we’re all doomed.” And yet it doesn’t appear that the supply side is going to accommodate the demand projections for a significant retrofit for our grid, not only here in the United States, but certainly around the globe as well. Would you compare gold as a good trade to copper as a great trade, or maybe you wouldn’t order them that way?
Gregory: I think they’re both great trades, potentially. I really do. I think you have a lot higher to go. I was projecting $6 copper middle of early last year, so we got in on that trade really well. We got out really well ’cause it kind of felt it coming. I don’t know why, just one of those instincts. You do this for 40 years, you see the pattern, you see some of the way that things trade during the day. You want to talk about how things are the same. Again, it’s kind of human psychology and human behavior to whatever extent that, I’m a math and science guy. At the same time, I seem to have an ability to recognize patterns and that’s really been helpful to me in my career.
So I think those two trades set up very well for longer term because the fundamentals are so compelling. Simple supply-demand dynamic in copper and really simple global macro monetary blowup every currency now. So I think both of those trades are great trades.
Trades that are different would be like coffee right now. So coffee’s not going to go up and then stay up and keep going up. Coffee’s the kind of thing, like with cocoa where you need to get out, you need to take your profits because these things spike up and they spike back down. Copper has been like that, but I think that’s changed with copper. So again, $6 is kind of my target, but I was actually doing some math on that one too, that projects potentially— If you look at the copper mining shares and you want to do some of the overlays there, it puts copper somewhere between $7.50 and $9.
Now, that’s a very unscientific way to look at it, but it’s just one of many inputs. Again, as many inputs as possible. And one of my credos from the very beginning of me doing this is everything matters and connect all the dots. Even places where you don’t think it matters, it could be telling you something about what’s going to happen next into places that do matter.
So to me that’s really important to watch the emerging markets and like I said, ever more polarized. So I think that the dollar down will be a great trade, but not as a dollar trade, as other currency trades. And there’s going to be good ones and there’s going to be bad ones. I think JGB down could be a great trade, but there again you’re going to have to take profits and it’s going to be choppy ’cause they’re going to fight it. So you’re dealing with a lot of factors and a lot of different market types.
And when we go back to the stock market and all the credit spreads and why is there’s so much calm, and it’s kind of funny because normally I’d be so bearish right now, but I think the fact that the Fed’s going to turn with inflation still above target speaks to the thought process that they’re acquiescing to high rates of inflation ’cause they have to ’cause the 40-year trend down is over and we have so much debt that we got to protect the economy or we’re looking at a debt deflation and that’s the last thing we want. Well, that’s good for stocks. When you have a declining currency, does that mean that the stock market’s going to keep pace with the debasement and the devaluation of the currency? No, absolutely not. Argentina stock market, new high, Turkey stock market, new high, Pakistan market, new high, what do these things have in common? Currencies that are getting filleted, it’s gold in those currencies that has kept the value, not the stock markets.
And that is something key that US investors are going to have to learn or they’re going to get filleted because you’re going to think you’re doing well with whatever percent return you get in passively investing equities, and equities will probably go up in this situation. So I think the [unclear] has some rationale to it, even though it seems to be irrational because normally it would be irrational. But I think maybe that’s something that’s changed here too, that you’re not going to get the big purge in equities that you need, I think, to get the Fed off because the Fed will come off their stance before that happens and that’ll just drive stocks even higher. So that’s another interesting little nuance to what’s changed here.
David: Connecting a lot of dots obviously is something you love to do. You mentioned Newmont, and as the largest gold miner in the world, you’d expect to see gold a hundred bucks off of all time highs trading really well. And yeah, I think it speaks to the traffic flow. There’s been some people taking the track to gold bullion, central banks, Asian buyers, but the West has left it untouched, and evidence or if you wanted proof of that, look at your mining equities relative to gold and Newmont, the largest, no play, no play at all. And to your point, yeah, they’re still in Nvidia, they’re still in a variety of winning trades, at least for the time being, and there’s been no reason to change horses in the middle of the race. What do you think would inspire that migration?
Gregory: Well, I think that that takes some kind of event. This is almost an event risk where it’s geopolitical. Let’s keep in mind that the Middle East situation’s not solved, the border situation’s not solved, and you might say that terrorists lay in wait in the US, and certainly that’s been the warnings from officialdom here in the US that you have cells that are gathering, you’ve had a lot of ISIS cross the border, certainly the situation in Europe. Come on, I mean Europe, it’s like the dominoes are kind of falling. Orbán in Hungary has been almost pro-Russian this whole time to some extent. Turkey is kind of in that camp. Now, you draw the Czech Republic in. That’s really interesting to me. This little coalition now of the far right in Austria with Czech and Hungary where they are basically kind of supporting Putin. India, okay, Modi visits Putin and they’ve been buying crude oil from Russia the whole time. Why? Because nobody cares what the US says anymore.
And why should the US have the right to tell anyone what to do, frankly? Our own house isn’t in order and this is what Xi keeps saying. And I’m full-blown American. I love this country and I want to see it succeed, but we’re getting kicked politically. And that’s not just even Biden, this is bigger picture than just one guy. And in that case, these are the kind of things that really disturb me about the stock market.
So I think just in terms of what could come next would be a major stagflationary economic event too. And let’s not forget, you have multiple periods, including during my career, where stocks went sideways for 10 years and went nowhere, did not make new highs. So I could easily see something like that evolving where it’s not necessarily a kind of a crash, it’s just you get no growth. You need growth to support this debt, and we don’t have it. What’s the engine of growth? We’ve tapped out the consumer, all right? China in terms of their dynamic with us in trade, not going to cut it in terms of the growth we need.
This is why you have this clean green energy movement. It has nothing to do with saving the planet. They’re smart enough to know we can’t save the planet. What’s happening is so much bigger than us. It is so human egocentric to think that we affect the planet and all what you said about cow farts and those kind of stuff. It is just misdirection to get to the point where we are spending all this money because we need an engine of economic growth to make sure we don’t have a debt deflation. So when you see through the smoke, you really see the reality of it all, and it’s a little ominous in terms of the US and in terms of the economy and in terms of the standard of living and in terms of the dollar. Let’s be real. I’ve been talking about this since 2018.
For me, the biggest shift since 2008, if you want to talk shifts outside of what happened in 2008 in QE and they decided to paper it over, which kind of blew everyone away, was in 2018 when China opened crude oil futures trading the benchmark OPEC Dubai crude priced in Renminbi and they got Russia to benchmark the Urals crude against it. So that to me was the beginning of the end for the dollar. And this is a big picture thing. They made a move just two days ago to bring their underlying fixed income markets up to speed in terms of repurchase agreement, all the things that the Fed does to manage the bond market. One of the big criticisms about, oh, they can’t play the dollar card, meaning China, China plays the dollar card. They say, we’ll accept only Renminbi for exports and we’ll pay only Renminbi for imports. Why? Because we’re three to two bigger than the US and much bigger than anyone else in trade. Now, we have the right of seigniorage, so take the right of seigniorage away from the US and I think that’s coming, and they play that card.
But to do that, they need a more sophisticated backdrop fundamentally in terms of the infrastructure of their markets, and they’re moving to do that. It’s another tell. It really is. And when you engage North Korea, why? Because you got South Korea, which again, look at the map, it’s right across from Shanghai and Beijing and the whole straits. This is why Taiwan’s in play, this is why the Philippines are in play. This is why Vietnam’s in play and Malaysia’s in play. Why? It’s the shipping route from the Middle East. Come on, it’s easy, just look at a map. So all of these things to me are big picture geopolitical risks that are right in front of us that are actually happening while we’re fighting amongst ourselves over some of the stupidest issues of all time, where some of the biggest issues of all time are completely ignored, at least by the current people that are in charge of this country, and it’s really sad to see. It makes me cringe at the same time about what’s coming next.
David: We’ve been in the physical metals market since 1972, helped get gold legalized in 1975, my dad and a couple of other gentlemen did. So when you’re talking about 4945 as a 10-year possible destination for the gold price, and you mentioned $50 silver, I recall the ratios and I think, well, if we just maintain an 80:1 ratio at close to $5,000 gold, you’ve got $60 silver. If you see more of a contraction in the ratio, out-performance of silver, 50:1, it puts you closer to a hundred bucks. And that’s not the Hunt Brother days 15:1. That’s not what we’ve seen in the last couple of decades as an extreme of 30:1. 50:1 is not that aggressive, but that’s close to three times current pricing. What would you say to silver playing an outperforming role as time goes on?
Gregory: I’m on board with that, and I’ve said that myself, $100 silver. So $50 silver to me is a kind of a near-term target. Honestly, I think it could blow out to there by the end of the year. So that’s a pretty bold statement. And I don’t look at it like, “Hey, it’s easy for me to make bold statements just to make bold statements to maybe be right 1 out of 20 times.” If I don’t believe it, I don’t say it. And in this case, I think you could really pop to 50. But longer term, I have no problem with a 100. I have said a 100 a couple times in the last six months or so. Now, with the way things have changed just even in the last two weeks here in the US, I think that that’s a very real possibility.
And frankly, when I heard you ask that question, I was already of course thinking ahead. Everyone’s prone to do, right? But if you’re at 4,900 gold, I don’t think silver’s a 100. I think silver could be 200, 250, give it like an old school palladium price back in the early ’80s, late ’70s, something like that. And I don’t think you can say any price is outrageous these days.
David: Now we’re talking about fiat currencies. What is outrageous? We don’t have a real stable reference point.
Gregory: And this can go on to infinity. Dollar could be down 90% and then down another 90% and then down another 90%. So this is the thing I don’t think people understand. There’s no zero. Currencies keep being devalued. Just look at where the Argentinian Peso is. And when you talk about gold and you talk about where you are, too, gold on the TOCOM in yen terms, in yen per gram is 13,000, almost 13,000, like 12,600 yen. That’s doubled since 2021. Think about the country of Japan and how the purchasing power of the yen has been internationally devastated. So this is why you don’t hear about Japan buying Rockefeller Center or Pebble Beach or any of those things anymore from 30, 40 years ago. But it’s a good example, again, to just not think that something can’t happen because right now anything can happen.
David: You mentioned earlier nat gas, and I’m curious your thoughts on crude and nat gas.
Gregory: Yeah, I like them here, both. I think nat gas is a choppy one because it does have a surplus, and it is, of course, big production here in the US. Having said that, production’s flattened out. It’s not growing anymore here in the US in even the primary fields, some of them are even down. A couple of them are down in production over the last two years or so. So I think that’s a big factor, number one, for me, because when you’re at $1.40, like you were recently, anytime you’ve been below $2, and certainly anytime you’ve touched a $1.50 handle, the next move is to 4 bucks or higher. So below $2, natural gas is just pure value. And when you even hear when it’s trading, roughly 3 to 3 and 1/4-ish, depending on which contract month you look at, I think that’s priced in a lot of the bad news. And the surplus is shrinking, and demand is going to go up here because of the weather and that is a long-term trend.
And of course, it’ll be choppy and of course, it’ll be lower at times. It’s not something you’re going to buy and put away for 10 years, but I think for the next three to six to nine months, I’m not a scalper, I’m not a trader. People say you’re a trader or investor, and I hate that question because I feel like I’m neither. I want to hold positions for a year and a half to two years if I can, and I have in the commodities, in futures. Typically, it’s more something like a couple of months if it’s a big position. So I look at natural gas like something like that.
Crude oil, you’re below the five-year average in terms of supply. Supply seasonally has already turned down and you’ve seen some really big declines over the past 13, 14 weeks, and it’s kind of picking up again to the downside. In other words, weekly declines. I think you’ve used so much of the SPR, you dumped about a quarter of it, about a hundred million barrels lower in total supply including SPR, versus a year ago here in the US, and the commercial supply below the five-year average, not that far away from the five-year low, and this is why you still have the swap rates really high. And the December 12-month forward still is almost $6, meaning the nearby contract is priced $6 higher than next year’s December contract because you are worried about not having enough supply brought to the market to meet demand. So you’re willing to pay $6 more now than crude oil, which you have to store, you have got to insure. Same with the metals. There’s a cost to carry, so to speak, that is upside down because that’s how under-supplied, theoretically, the market is that you’re willing to pay $6 for crude now versus a year from now. When you see things like that, and I think in terms of gasoline, I think gasoline prices, again, anywhere below $2.50. When they were $2 it’s just absolute value because you know they’re going to produce less and you know you can’t meet all these goals that they’ve set out for electric vehicles. It’s insanity. It’s random. There’s no basis in reality to even achieve them. It’s just about deficit spending to try and support the economy, but that makes gasoline a buy-the-dip mentality, same with crude oil for now.
Frankly, the risk dynamics in energy are huge. I know some of my biggest hedge fund clients, and I mean literally some of the biggest hedge funds in the US on the planet, whatever, they refuse to be short crude oil. They will not be short crude oil, and I think that’s an interesting little tag on that. Anytime you see dips, they’re more and more short-lived it seems. I think I like energy a lot right here, both crude and gasoline at the moment.
David: You’re talking about kind of the holding patterns of you’d like to be 18 months, one and a half, two years. Let’s say you’re getting on a boat. You’re sailing around the world. You’re not going to be touching your portfolio. You can’t for at least 24 months. How do you position it?
Gregory: I get out of everything because it would drive me crazy having to be out on the ocean by myself and I don’t know what’s going on in the world and I can’t trade. I don’t want exposure. No, I’d probably just put everything in gold. I mean honestly if you want to ensure that you’ll be able to afford stuff when you get back, I think that’s just the safest way.
I’m not against crypto either, frankly. I think it’s kind of shown itself recently to be more of a risk asset than a safe haven. Certainly, in the case of a CME, a coronal mass ejection, basically a sun storm that knocks out the electrical grid, Bitcoin is not going to get you anything. It’s always gold above everything in the old Jim Grant pyramid. I don’t know if you remember that.
David: Oh, sure.
Gregory: That was the late ’90s, but the pyramid of assets and gold is the one triangle at the very top, and I believe that. Now I’m not a gold bug either. I mean I want to be involved in the currencies and the bonds and even in the equity markets potentially. I think right now it’s kind of like sell the rally in the US and I think the Russell is the place to be. Just look at it. Until today it was down on the year whereas the Magnificent Seven is up 48% and the S&P is up only like 6%. The stock market is the death of breadth because there is none.
David: The pyramid you’re talking about from Grant was originally from John Exter. He was at the Fed, and the inverted liquidity pyramid, and just showing where the strength in the market and where the weakness lies, where you have liquidity, where you don’t, and ultimately where the safest bet on the planet is.
If you want to take risk out of the equation, John Exter from our central bank many years ago, gold, that’s it. We’ve talked about the dollar. We’ve talked about bonds. We’ve talked about geopolitics. Let’s talk about something. It could be personal. It could be professional. Best book you’ve read in the last 12 months, do you recommend it?
Gregory: Yeah, it’s called Becoming Supernatural actually. It’s just about now how we’re learning more about how the human brain works. When you start to talk about what is happening with the science, too, I believe that we are much superior beings than we even realize with talents. You talk about stuff like telepathy and remote viewing and all these kinds of things really fascinate me.
It’s almost becomes like it’s a spiritual thing too when you kind of tie in the Kundalini work, energy work. It’s all about energy. Everything is about energy and vibration. That’s one thing I’m on. The other book I’m actually reading right now, believe it or not, is Market Wizards by Jack Schwager for maybe the umpteenth time.
David: Umpteenth time.
Gregory: It’s one of the most abused books that I have in my collection. I have a big book collection because I’m a major reader, but we do a podcast too. It’s called Money Markets and New Age Investing. One of the things I’m going to be doing over the next couple of podcasts is reading excerpts from the book. I actually talked to Jack over the weekend, the author. He used to work at Pru. I used to be the Pru metals guy, and I wouldn’t say I’m friends with him, but we know each other professionally.
It’s just a great book, and interviews with guys that I’ve worked with, Tudor Jones, Ed Seykota, Michael Marcus who used to be at Commodity Corp. Several of the guys in this book I’ve either had as clients, Bruce Kovner, or I worked with. Ed Seykota actually was one of the kind of trainers when I was working at Commodity Corp that they used to bring in for periods of time to help with trading psychology and stuff like that. I’m going to be reading excerpts of the book and how they apply now because, man, I’ll tell you what.
This book is timeless because being good at doing this is timeless. You are dealing with some of the same things that we deal with in terms of human nature and psychology. That’s the most important thing, discipline, and let your profits run and cut your losses. That is cliche and it’s a lot harder to do than it sounds. One of the things, and maybe I’ll ask you.
What I found in doing this for as long as I’ve been doing this, the single hardest decision is when to get out of a profitable trade. That’s the hardest dang thing to do, the single most difficult task. There’s some pretty interesting thoughts on that from Ed Seykota. I’ll be reading several chapters of that, and I hope that Jack’s going to agree to discuss the book on the final in this little series we’re going to do on my podcast.
David: You’re right. Putting on the right trade is not as hard as taking it off and knowing when to hit the road.
Let’s come back to where we started. It’s 15 years since we last spoke. I don’t think we need to wait that long again, but let’s say we just get busy and 15 years from now we’re having a conversation. What do you think the world looks like? What’s something you’re glad has materialized and what’s something you’re just, “Oh, crap, here we are, 15 years,” a positive and a negative projecting 15 years out?
Gregory: I know. I think the good news is kind of a spiritual revolution to whatever extent and kind of the evolution of the human species if we can set aside all of this differences. I don’t know what it takes to be the catalyst for that. I’m not sure I see one. When people ask me what do I see for the future long after I’m not here, I see a combination of Terminator and Mad Max, at least in the US, at least to whatever extent. Terminator because AI and robots, I mean do we not understand?
I mean they’re making robots now that can learn to have emotional responses, right? I don’t know if you’ve seen this one where they have created a robot that knows when to laugh and laughs. Now it maybe doesn’t know why or anything, but I mean when you talk about being able to differentiate real people from robots, that’s not that far away from where you can’t do that. I worry about that kind of thing where, guess what? We’re kind of locusts in the world in some degree and to whatever extent, AI.
The other thing I’d mention too about AI by the way, people are so shortsighted that it’s all about the near term profits with AI and stocks and NVIDIA and all the chips and all the technology and applying it to your products to sell it. It’s become so corporate driven, everything. It’s like that movie Network from the 1960s with William Holden where it’s like the president is powerless. The guy who has the most power is the CEO of the conglomerate company that runs every other company on the planet.
It’s almost kind like that to the extent that every company wants to roll this stuff out, but let’s stop and let’s ask ourselves one real simple question. If AI, artificial intelligence, in other words it learns itself, you’re not necessarily teaching it. You’re not going to teach it what you want it to know because if it’s going to be as good as everyone wants it to be or thinks it’s going to be or portends that it will be, then it’s going to think on its own.
What is maybe one of the first things it realizes? This whole financial system of credit is unsustainable and it collapses the system because it’s the smart thing to do to start over. There will be pain for a whole generation, multiple generations maybe of people, but in the long run it will be better for human society. I mean think about that. You’re creating AI which could go out and blow up the markets because that would be the intelligent thing to do. In terms of the Mad Max sign, it’s like you do all this with EVs. It doesn’t work.
The planet gets kind of fried to some degree. The rotation changes or the tilt changes or you get coronal mass ejection or whatever where you’re relying on gas. Certainly, supply chains break down and you have this kind of anarchy type of situation. I think politically in the US one of the other things too is you’re looking at a civil war. I mean you could have a civil war that could be a war of race, of religion, of politics or class. I see potentially roving bands of people that are homeless that are looking for food, taking over.
There was actually an article about it. There’s a group in South Florida here that wants to march on Bill Gates’s Wellington Horse Ranch, which is like 43 acres, and turn it into a refugee for homeless people. That kind of thing is coming. I was recently looking, if I wanted to maybe have a compound and move somewhere that’s way out of the way, at the western part of Arkansas. Why? Because it’s the furthest away from any major state highways. Stuff like that’s on my mind. I’m not going to do that because I’m probably not going to live to see it, but I think that’s the future.
David: Civility is certainly already extinct. We’ll have to see how we handle some of the conflicts and things in the political sphere. We may have— Get your popcorn ready. We’re only a few months out for something that is either entertaining or horrifying or what have you even this year. 88 elections this year, ours is just one of them. We’ve already had it get a little spicy here and there, more to come.
Mr. Weldon, thanks for joining us. We look forward to, again, we will not wait 15 years to have another conversation, but appreciate your insights and perspectives and look forward to doing this again.
Gregory: Sure, it’s my pleasure. I would say in terms of what you just said about later this year it’s almost like it doesn’t matter who wins. Half the people are going to be pissed off. There’s going to be some kind of upheaval no matter what happens.
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Kevin: Dave, I like that sailboat quote. If you’re going to have to be on a sailboat for a couple of years, which that by the way sounds really good, just put 100% in gold. You guys covered an awful lot of ground.
David: That way you’re able to come back and afford whatever you need.
Kevin: That’s right.
David: I enjoyed reading the book years ago, Gold Trading Boot Camp. It’s a little dated now. I do love the fact that Greg is rereading Market Wizards. There are some things that never go out of style. Seeing how some successful traders have done well through the years, the approaches they’ve taken, it is definitely a primer for that. I would highly recommend that as well, and it is interesting to see how these things interrelate. The markets interrelate.
You can’t talk about currencies without talking about commodities. You can’t talk about commodities without talking about currencies. You can’t talk about the stock market without talking about the bond market and interest rates. There are so many of these market dynamics that are interconnected, and as one thing shifts, so many things shift in a sequence thereafter.
I do love that we covered a lot of ground today, and I think it demonstrates well the importance of being multidisciplinary in your thinking.
In full disclosure, the companies listed in today’s program, Newmont and Barrick, are owned both by our company, by clients, and personally. That is not a recommendation for those companies. It would have to be under full and complete review of someone’s financial picture to see if that is appropriate, and that can be done by a financial professional.
Kevin: You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick along with David McAlvany and our guest today Greg Weldon. 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.
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