Podcast: Play in new window
This week on the McAlvany Weekly Commentary, David McAlvany looks at the growing use of the Chinese yuan in world trade and why that trend may be bullish for gold. As more countries look for alternatives to the dollar, gold recycling may begin to matter more than dollar recycling. They also discuss whether AI can realistically help solve the growing fiscal mess, or if that hope is just another magic rabbit pulled from the hat. Plus, a look at the Dow’s performance relative to gold over the last 25 years, and why that comparison tells a very different story than the headline indexes.
- Gold Recycling Replaces Dollar Recycling As Yuan Is Used In World Trade
- Will AI Be The Magic Rabbit To Solve Or Fiscal Mess?
- Dow Down 70% Relative To Gold Over Last 25 Years
The McAlvany Weekly Commentary
July 1, 2026
“The critical nature of onshoring, it is one of security, national security, and it’s something that is not lost on the White House. It is not lost on Scott Bessent. And so the imperative to onshore, very much there. What that means is that we’re making a policy choice that runs at odds with the policy choices of the Chinese. And how are those going to balance each other out? Do they cancel each other? Not really, but they’re in direct conflict.” —David McAlvany
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Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick along with David McAlvany.
Well, David, you are in a different location than the studio right now. Isn’t it nice? I mean, technology we can just talk like we did last night. We had a Talisker and we’re looking at each other, what, probably 1200 miles from each other. And today we’d like to talk about the Dow hitting all-time highs.
David: Yeah. It’s like a redo from COVID. We can still hang out and sip a scotch and have a conversation and here we are today. The Dow reached another all-time high this week, and gold continued to test lower levels. Looking only at nominal prices, you could easily conclude that stocks have been the superior investment over the past quarter century.
Kevin: Isn’t it amazing though, Dave? The Dow is down 70%, actually, relative to gold. Even with gold’s correction, the Dow’s down 70% over the last 25 years, but like you said, nominally it may not look like that. So explain the Dow/gold ratio.
David: The more important measure is not price. It’s relative value. And the Dow-to-gold ratio currently stands at roughly 13-to-1. 25 and a half years ago is approximately 43-to-1.
Kevin: I remember that.
David: It has gone from 11,300 to more than 52,600. It’s a gain of 4.6 times. Its value measured in gold has fallen by nearly 70%. So in real money terms, the Dow has not kept pace. Gold’s been the winner. It’s been the winning trade for almost two decades—more than two decades. And I think the ratio will continue its long-term compression towards the low-single digits, where it has repeatedly bottomed throughout history.
Kevin: You know, you had talked to Pierre Lassonde a couple of years ago and he made a call for the Dow-to-gold ratio to get to about 2-to-1. He also predicted a price, didn’t he?
David: Yeah. I met him at Jim Grant’s conference, the Interest Rate Observer author, and he does a great conference at the Plaza Hotel in New York every fall. And Pierre was a featured speaker there last year. So he suggested that gold could ultimately reach 17,250 an ounce, with the Dow-to-gold ratio compressing to 2-to-1. And whether those exact numbers prove correct, I think that’s less important than the framework itself. A 2-to-1 ratio could occur through substantially higher gold prices or lower equity prices or some combination of both. If you just held the Dow constant at prices today, you’d be talking about a 2-to-1 ratio and gold price per ounce at around 26,000 an ounce. So I mean, alternatively Lassonde’s 17,250, that gold target would imply a Dow of around 34,500 and those are the numbers that he had in mind roughly one-third below current levels.
Kevin: I think it’s good to go back and just say the Dow-to-gold, ratio when we’ve seen gold peaking relative to the Dow, has either been 1-to-1 or 2-to-1 each time. So 1896 when it was first being measured, it was at 1-to-1. 1932, it was at 2-to-1. 1980, it got back to about 1-to-1. And so there’s nothing wrong with actually saying that we could see that again, but I think we also want to encourage our clients to be willing to let go of some of their gold when we get to those ratios, because that’s a good time to buy stocks.
David: Yeah. Regardless of the precise path, long-term gold owners, I think they remain on the favorable side of that relative value trend. And to your point, our hope is that investors will eventually be willing to reduce their gold holdings opportunistically when the ratio reaches those historically attractive levels. Ironically, that will likely be difficult psychologically. So gold’s strongest advances have historically coincided with periods of financial stress and economic uncertainty. When that fear is fully reflected in equity markets, buying stocks and selling gold will feel exactly backward, even though history suggests that is the correct long-term decision.
Kevin: Well, it’s exactly against what your emotions are because at that time stocks will look terrible. But oftentimes I’ll talk to some of my clients’ stockbrokers and explain the Dow/gold ratio to them. It’s amazing, professionals, these guys are in this every day and they have a hard time understanding the underperformance of the Dow relative to gold.
David: Comes as a surprise. And I was reminded of this several times over the past month. Two professional money managers that I spoke with expressed genuine surprise when I pointed out that gold has outperformed equities over the last 25 years. To them, what is gold? It’s an irrelevant commodity. It’s a portfolio afterthought. Their preferred allocations remain private equity, private credit. Today’s most popular equity trades, what’s ever working is what’s at the tip of their tongue. So of course there’s extraordinary exceptions in terms of outperformance, even relative to gold. Bitcoin since inception, NVIDIA over the last several years, investors who entered those trades early achieved remarkable returns.
Kevin: It’s interesting you’d say that, too, though, because gold has been sort of the idiot-proof investment. You just go, “I buy a little bit of gold every two weeks.” And I know your dad, we’ve talked about it for 54 years, your dad would buy usually at the highs, whatever the high was at the time, he would end up buying it and he’s done just fine. With bitcoin, yeah, there are guys who got into bitcoin early, but think of how many other investments are out there like bitcoin that people got into early and then they just disappeared. So that’s not an idiot-proof investment.
David: Right. Well, and as we talked about with last week’s guest, the contemplation of buying something really cheap. Then the question is, what was your justification for continuing to hold it? Once you had seen it go up 100%, 300%, 500%, 1,000%, most investors have already hit the exits if they were the adopters. But the experience of the average investor is often very different. Once a compelling narrative becomes widely accepted, prices have already appreciated dramatically, and it’s that past performance that begins to attract capital precisely when future returns are becoming less attractive. Momentum becomes the siren song, investors flow in. They just can’t say no, but it obviously is at a place where you’ve got much higher cost basis.
Kevin: Well, and a lot of people over the last few years have been buying bitcoin at a higher cost basis.
David: Yeah. Michael Saylor, who runs Strategy, the company which was MicroStrategy before the rebrand, they own approximately 847,000 bitcoins. That’s [unclear]. But their average purchase price is around 75,000 per bitcoin. Even the largest institutional buyer has accumulated much of its position at prices far above those available to the earliest adopters. And that stands in sharp contrast to the handful of investors who accumulated meaningful positions when bitcoin traded below two bucks. Yeah, I know one gentleman who was buying upwards of $100,000 worth of bitcoin at a 1.50 per bitcoin. He’s an early adopter. That’s not the Michael Saylor story. He’s a little bit late to the game with a cost basis of 75,000 and above.
Kevin: It reminds me of some of the stories that you hear with multi-level marketing companies. You see these people get fabulously rich because they told five friends who told five friends, who told five friends, but rarely ever do those companies yield much result for anybody who comes in late.
David: It works very well for the first five and then there’s everyone else.
Kevin: That’s right.
David: The lesson extends beyond cryptocurrency. Late cycle investors, rarely compound wealth at the same rate as those early entrants. And the same principle applies to richly-valued equity markets. Starting valuations matter, putting money to work in the equity markets today, you are talking about very, very costly investments.
Kevin: So, speaking of equities, idiot-proof, let’s go back to idiot-proof. You buy gold, but you also watch the ratio, right? The Dow/gold ratio is very simple. Anybody can calculate it. You divide the price of the Dow by the price of an ounce of gold. That’s pretty idiot-proof. And as you get close to 1 or 2-to-1, you start saying, “All right, maybe it’s a good time to buy some stock.”
David: Yeah, that’s why I like using the Dow-to-gold ratio. It largely removes the need to predict absolute prices. So whether gold really reaches 5,000 an ounce or 15,000 or 50,000, it matters less than its purchasing power relative to productive assets. The ratio provides an objective framework for exchanging one asset for another based on relative value rather than, frankly, what can get involved when you’re talking about nominal prices: emotion.
Kevin: Well, and we were at 42 or 43-to-1 back 25 years ago. Now we’re at 13-to-1, but if we go from 13-to-1 down to 1 or 2-to-1, how much does that compound the amount of stock that you can buy?
David: Yeah. It really makes the next leg of the trade the very attractive trade. So a move from today’s 13-to-1 ratio to 2-to-1 would increase the number of Dow shares purchasable with the same ounces of gold by roughly 550%. That’s a lot more shares. All else being equal, that would imply dramatically higher future dividend income and a much more attractive basis from which to compound your equity returns. So the Dow/gold ratio when it gets to those very attractive levels, you are talking about buying basically trough levels in the Dow, which again allows you to compound growth off of that low basis. And in this case, it would be with 550% more shares, 550% more horsepower, so to say.
Kevin: Well, and that can happen with the Dow falling either a lot further than we would expect or it can happen with gold rising. Either way, it doesn’t matter because we’re looking at a ratio.
David: Yeah. It’s also worth remembering that Lassonde’s illustration assumes only a modest bear market in equities. And you might say, “Well, 34,500, that doesn’t sound very modest compared to 52,000. That’s a big haircut.” But historically, major bear markets have followed the extended bull markets, and we’re now 17 years into a bull market. We think it could go considerably deeper. Reference points being 1906 to 1921, the Dow declined roughly 69%. From 1929 to 1932, it was approximately an 81% drawdown. From 1937 to 1949, about 68% loss. And from 1968 to 1982, an approximately 63% loss in nominal terms and nearly 80% after adjusting for inflation. And even the most recent secular bear market from 2000 to 2009 produced a decline of roughly 60%.
Kevin: So the moves that we’re seeing right now, like with the gold correction since January in gold and silver, those are cyclical moves. And the difference between cyclical and secular, because you used the words, “secular bull market,” when we’re talking about the Dow/gold ratio, we’re talking about secular markets, much longer horizon-markets, right?
David: Yeah. Robert Rhea and Richard Russell were very keen on describing the difference between secular trends and cyclical trends like the tide coming in or going out. Tide coming in or going out is the secular trend, and then catching a set of waves is like that cyclical trend. So if you can imagine being a surfer getting out on the ocean, and you’re waiting for the perfect set. Well, first of all, you don’t go out if the tide is out because there’s no waves to catch. So you’ve got to wait for a favorable macro, larger-picture environment. And I think that’s where we see gold in a secular long-term trend, bullish trend. And if you get a short-term cyclical period of time where we’re just waiting, we’re waiting for the next set of waves. The tide is in.
Kevin: So catch a wave on gold right now. I mean, as far as the correction, how far do you think it might go down?
David: Yeah, I would say that the tide is in. The waves we wait for, and so we’re having to be paddling around, waiting. And your question of how low the price of gold goes, I don’t know. Corrections take on a life of their own, just like increases in price take on a life of their own. Sometimes they go too far in either direction.
I would say this: you can count the downside in hundreds of dollars, the upside in thousands. And that seems like a pretty good balance in terms of risk versus reward. Yep. You could have a few hundred dollars’ downside from here, and you’ve got a few thousand dollars’ upside from here as well. And by few thousand, Lassonde’s right, it’s more than a few thousand.
Kevin: Maybe many thousand.
David: Exactly. So will gold retrace 50% of its advance? Will it retrace 61.8%? These are your classic Fibonacci numbers. Deeper correction, does it give back the entire move? No one knows, but we’re, again, likely discussing hundreds of dollars, not thousands. And I think, for long-term investors, the more important questions are strategic rather than technical.
So do you own enough gold if the global monetary system is entering another period of transition? Do you own enough if the Federal Reserve finds itself constrained between persistent inflation and excessive government debt? Do you own enough relative to historically expensive equity markets? Do you own enough in an environment where inflation remains structurally biased upward? I think those are the questions that matter.
Kevin: So we’ve got Kevin Warsh in now, and so the topic again is interest rates. You’ve got Trump saying that interest rates have to come down. Kevin Warsh has already said that he’s going to try to stabilize the inflation rate. So how does that happen?
David: Yeah, this is such a fascinating setup, Kevin, because on the one hand, if we get any weakness in the equity markets, you typically see a move towards bonds and you may well see sort of a snap judgment for a week, a day, what have you, looking for a safe haven. But interest rates are already in a very curious place. They continue to reshape the valuation of virtually every asset class, and whether policymakers would prefer lower rates or not, inflation continues to place upward pressure on long-term yields. Yield curve control may eventually become a part of the policy response, but until then, the long end of the Treasury curve remains the market’s best estimate of future inflation-adjusted returns. Today, those real yields remain very compressed.
Just go back one year ago. One year ago, real yields ranged from 1.2, 1.3% to upwards of 2.5%, and that’s across the entire yield curve. Today they’re negative. They’re negative out until the seven-year mark. And even if you go out to 30-year Treasuries, they offer only modestly real returns in the 60-to-70 basis-point range.
I enjoy following those kinds of long-term trends, a resource that I continue to recommend is Ron Griess’s Chart Store. Ron produced charts for Ian McAvity back in the day. He was an early Commentary guest, and he provided those charts for him for many years, and his weekly chart service remains one of the best technical resources available, and much of the yield curve work that I was just discussing comes directly from his weekly chart blog.
Kevin: We were talking today with Drew, and Drew’s been with the company 40-some-odd years. And he said, “All I know is the 65-week moving average is a safe place always to buy.” And that’s not predicting a bottom in the market, but down where we’re at right now, it seems like this is a good place to add some gold.
David: Yeah. When you’re in a secular uptrend in the metals market and the price gets to the 65-week moving average, it can go lower. But now you’re talking about sort of the rubber band stretching on the downside. There’s a natural energy which below the 65 week begins to draw it back up.
If you already own enough gold, consider whether there’s opportunities to compound those ounces through disciplined ratio trades. Over the last six months, we’ve completed several successful swaps between gold and silver as relative values shifted. Those opportunities will continue to emerge.
This is a great time. Again, if you already own enough ounces, talk to your advisor about what’s next, because I think as those opportunities emerge, it’s worth looking at your portfolio construction because those critical decisions allow for investors to increase their ounces over time without adding new capital.
Kevin: We’ve talked about pricing things in gold and just being able to see what those ratios are. So we talked about the Dow. We also price silver in gold, but isn’t the key, Dave, in life and in investing is knowing what to hold at what time, but it needs to be real. So watching these ratios is a way of eliminating worry about the devaluing dollar because you’re not basing it in dollars, you’re basing it in other real things.
David: Yeah. I mean, ultimately wealth preservation is not simply about owning the right asset. It’s about exchanging assets when relative values become extraordinarily favorable. The right asset to own is always changing. Well, I take that back. I think gold has never been the wrong asset. The question would be appropriate proportions within a portfolio. We mentioned Richard Russell earlier, and I grew up reading the Dow Theory Letter, and he would often refer to the sort of benchmark for high-net-worth or ultra-high-net-worth families. Everyone should have 3,000 ounces of gold. Now, at 4,000 an ounce today, that’s a lot of money, but he was having this conversation when gold was $300 an ounce, and it was just, yeah, it was a ballast asset as a store of value. I think there is an aspect in which gold is always the right asset to own, but there are opportunities when its current market value makes sense to trim it back and migrate it over.
We’re not there today, but what we’re talking about with the Dow/gold ratio is anticipatory. It’s in anticipation of making that kind of move, and I think that’s still a few years out, but I think we’ll get there relatively quickly.
Kevin: Well, and we have to keep in mind we’re of the generation where the dollar was the reserve currency, bar none. And at this point, what we’re seeing is an unofficial reassertion of the gold standard. So what are the trends that you’re seeing right now that would continue this secular trend for quite a while?
David: Yeah. Two themes stood out to me this week. The first was the growing problem of global economic imbalances. And the second was how those imbalances are accelerating the search for a new international trade settlement system. So we sometimes think about the role that gold plays as a reserve asset amongst central banks, or even for individual investors, that it is their own reserve asset. They can be their own central bank, so to say. But this is a little bit different. This is not just reserves to have sort of a rainy-day fund at the national level, or like you might for your own family. This is a means of playing a different game within the trade system. Michael Pettis consistently provides one of the clearest analyses of the Chinese economy. In his latest essay, he examines China’s persistent trade surplus and the unavoidable arithmetic that they impose on the rest of the world.
And what he’s getting at is that when one country makes a policy choice, it actually forces a policy choice onto other countries as well. One country’s surplus necessarily becomes another country’s deficit. So China’s trade surpluses are enormous, and it corresponds to deficits in other countries. So, roughly $280 billion of surplus with the United States, a combined 360 billion with the European Union, 115 billion with India, 100 billion with Vietnam. And the pattern repeats across much of the global economy.
Kevin: But this is a policy decision, Dave, isn’t it? I mean, China wants to run surpluses, and it forces everyone else into a deficit.
David: That’s right. These imbalances are not accidental. They are the result of deliberate policy choices. Beijing has consistently prioritized investment in manufacturing over household consumption, and that ensures that China remains the world’s dominant industrial producer. So capital flows into factories rather than towards consumers or various social safety nets which favor households, and that increasing production capacity ends up suppressing domestic demand. The consequence is predictable. You’ve got surplus production, and it has to be exported abroad. Any surprise that the countries that I just listed have massive trade deficits.
Kevin: Right. And so you’ve heard Trump basically say, we need to bring manufacturing back, but the entire world economy has been reshaped over the last 40 years.
David: Yeah. And I think the exports from China have reshaped the global economy. Cheap products—often subsidized Chinese manufacturing—have reinforced dependence on imported goods, and that has steadily eroded competitiveness of domestic manufacturing in the United States and Europe and many emerging economies. This is frequently described as the outcome of free markets, but I think that characterization is really incomplete. Markets cannot be considered fully free when production is heavily influenced by state subsidies, by directed credit, by industrial policy.
Kevin: Again, this is a policy decision, like you said, industrial policy.
David: Right. What we do see is that Trump and Bessent are working that back, and would like to, if you want to put it in terms of capturing more export market share, you can, but really it’s of a strategic nature in terms of onshoring and bringing back manufacturing to the United States.
Pettis argues that economic imbalances are fundamentally the result of policy choices. So one country’s domestic policy inevitably creates external consequences for its trading partners. China’s decision to promote production over consumption has effectively become the industrial policy of much of the developed world. So every Chinese trade surplus requires a corresponding deficit elsewhere. As China exports excess production, other countries import both the goods and the hollowing out of their own manufacturing sectors.
Where that becomes critical, think about post conflict with Iran. Kevin, you might recall that we were talking about Department of Defense papers that were published a year, two years ago with a growing concern that we didn’t have the ability to replace our own munitions, that there were strategic critical minerals which are only processed in China. And so, to be able to integrate those into the supply chain was already a concern.
Now, post the Iran conflict, we’ve gone through a lot of munitions. How do we replace them? We’re talking about a five to seven-year cycle to replace what was just spent, and there is this unhealthy dependence. So, the critical nature of onshoring, it is one of security, national security, and it’s something that is not lost on the White House. It is not lost on Scott Bessent. And so, the imperative to onshore, very much there.
What that means is that we’re making a policy choice that runs at odds with the policy choices of the Chinese, and how are those going to balance each other out? Do they cancel each other? Not really, but they’re in direct conflict.
Kevin: It reminds me, I remember when I was a kid we were visiting an aunt and an uncle in another state, and I was down in the basement. And the first time I watched Frankenstein, it scared me to death because it was like, “Oh my gosh, he created something that’s now on a killing spree.” I remember I was a very little kid, and it was not a familiar environment. So, the whole thing was perfect. I’m glad it happened that way because I still thrill at that. But I remember when Nixon went to China, I was a kid. I was about 10 or 11 years old when Nixon went to China. Don’t we take the blame a little bit for this reshaping this whole surplus deficit thing? We probably helped design it.
David: Yeah. I mean, the irony is that the West helped create the system. 25 years ago the United States and Europe enthusiastically shifted productive capacity to China after China entry into the World Trade Organization. And this was some combination of labor arbitrage, which improved corporate margins. It lowered consumer prices. It boosted multinational profits. And so, of course, corporate America and corporate Europe, they were all over it. They loved it. The Berlin Wall fell, and it set in motion a series of daisy chain events, which led to this great opportunity and caused this boom, a massive boom. At the time, the arrangement appeared mutually beneficial.
And at the time, we weren’t considering China as a chief competitor, but what has changed in 25 years, now they very much are. And so, today those efficiencies increasingly look like strategic vulnerabilities.
Kevin: Yeah. And so, Scott Bessent is saying we need to change that.
David: Yeah. Recently summarized what the G7 now broadly recognizes as three interconnected global imbalances, and they play very well into Michael Pettis’s comment about these massive global imbalances. Chronic under-consumption in China is one, inefficient productive investment in Europe, and unsustainable fiscal deficits in the United States. These are three things that have to be resolved, and each imbalance reinforces the others. So, China needs a larger consumer economy, but will they do anything? I mean, we’ve been talking about that. In fact, we’ve been talking about rebalancing the Chinese economy directly with Michael Pettis.
I remember doing an interview with him in China, and he’s been on the Commentary a couple of times. That’s been a theme that we’ve been discussing for 15 years, and the consumption share of GDP has not budged in that time frame. China still needs a larger consumer economy. Europe needs to rebuild its productive capacity, as does the United States because of these strategic vulnerabilities. The United States must restore fiscal discipline while rebuilding critical industries at home.
Kevin: But as China’s grown larger, the one thing that has shifted is our trust. I mean, you talked about vulnerabilities. We’re now vulnerable even for our own defense to China.
David: Yeah. I mean, underlying all of this is a deeper shift in the basis of trust. Within the global trading system, there’s distrust of the US dollar as it has been demonstrated as a weapon in the modern world. The United States increasingly views excessive dependence on Chinese manufacturing not simply as an economic issue, but as a national security risk. Critical supply chain, strategic industries, essential technologies, they can no longer be evaluated solely on the basis of cost. So, again, when we built the system, post-WTO or the inclusion of China into the WTO, it was with the idea of labor arbitrage and improved margins and a better cost for goods delivered. It just seemed to make sense.
Kevin: But the Frankenstein grew, and now we’re having to deal with the Frankenstein.
David: Yeah, it’s a different monster. So, that is the fundamental objective behind the Trump administration’s trade agenda. They’ve got tariffs, they’ve got reshoring, they’ve got industrial policy, which are all attempts to reduce strategic dependence on China and restore domestic productive capacity. Whether those policies ultimately succeed is an open question, but the diagnosis is becoming increasingly difficult to dispute. The global trading system that emerged over the past quarter-century produced efficiencies, but it also created structural imbalances and strategic dependencies that are now proving increasingly difficult to sustain.
Kevin: Yeah. So, Scott Bessent is basically expressing what the Trump administration plan is. And you have, I think, a quote from Bessent that’s probably worth reading just so that we can discuss it afterwards.
David: It’s a long quote, but it comes from his presentation to the Economics Club of New York, and it really gives you a sense for what they’re after, which I think is very, very important.
He says:
In my remarks before the Economic Club of Dallas, I detailed how the structural vulnerabilities that we allowed to accumulate over time precipitated a drift into dependence. And last month I noted that under President Trump America has awoken to the risks that we can no longer ignore and is now attuned to the responsibilities we can no longer neglect.
So, tonight, I would like to take the next step and describe our strategy for economic statecraft, by which I mean the disciplined use of America’s economic power in service of our sovereignty. We opened a market because it helped to create a more prosperous world, and we tolerated imbalances because American economic strength appeared unassailable.
Over time, however, these choices hardened into habits, habits into assumptions, and assumptions left unexamined into vulnerabilities. We came to believe that access to the American market could be extended without condition and therefore without consequence, and to repair those imbalances with the world is not to retreat from it.
On the contrary, it is to engage on terms that make America stronger. It is to insist on trade that is fair, reciprocal, and consistent with our national interest, and it is to more closely bind what we should have never allowed to cleave our economic and national security.
So, tonight, guided by those priorities, I want to organize our approach to economic statecraft under President Trump into five core principles.
The first is that economic security begins with national capacity. The nation that depends on its adversaries for critical inputs is not truly sovereign, and the nation that reduces its economics to consumption is not truly prosperous.
The second principle is that America’s openness will be matched by reciprocity, which is the basis of durable cooperation.
The third principle is that America will write the rules of the next economy.
The fourth principle is that our financial leadership is a central instrument of statecraft. Of course, that leadership role bestows enormous advantages, among them lower borrowing costs, deeper capital markets, enhanced sanctions capabilities, and great influence across the global financial system.
The fifth and most important principle is that economic statecraft must serve the American people. The purpose of American economic statecraft is to connect national power with household prosperity.
Kevin: But, in summary, global trade has to be balanced somehow, and with China running the surpluses that they’re running, how does that factor in for gold? Let’s go ahead and talk about how this unofficial reassertion of the gold standard has something to do with this.
David: Yeah. Balancing global trade is essential. Reducing America’s dependence on Chinese imports is essential. And while Treasury Secretary Scott Bessent and Michael Pettis, they approach the problem from very different perspectives, I think both ultimately recognize that the global economy requires a significant rebalancing. So, from Pettis’s perspective, failure to rebalance leaves the world vulnerable to an increasingly destabilizing Chinese debt crisis. Their debt to GDP numbers are now second highest in the world. I think my concern is somewhat different.
Rebalancing the US trade deficit is a strategic necessity, and that does require reshoring production, rebuilding industrial capacity, restoring supply chain resilience. The difficulty is that we’re attempting this transition with roughly 40 trillion in debt. So, you go back to Bessent’s comment earlier: among these benefits of leadership are lower borrowing costs. Maybe, but I mean, what they’re asking is for the Federal Reserve to lower them now. Don’t make the mistake of your predecessor. Get rates down now. Lower rates are good for everybody. Get it done now.
And I’m not sure that that’s entirely the case. It may be good for asset prices. It may be good for the wealthy you have fat balance sheets and lots of assets to grow in that context, but lowering interest rates when you have inflation in the mix is a dangerous, dangerous thing specifically for American households.
Kevin: So, if you’re between a rock and a hard place, is there a rabbit that they could pull out of their hat, something that we’re not really planning on because you’ve got high deficits, we can’t have a strong currency and bring manufacturing back. What would be the magic cure?
David: Yeah. I mean, again, this is where it gets tricky. 40 trillion in federal debt, rising interest rates, an ever-growing interest burden that increasingly impedes fiscal flexibility, that makes industrial policy extraordinarily difficult, perhaps possible without a meaningful improvement in productivity. And so, waiting in the wings, the explanation for this massive improvement in productivity both from Bessent and Kevin Warsh, is that artificial intelligence—
Kevin: Ah, that’s going to cure it.
David: So, if AI produces a sustained productivity boom, the economy could grow faster. We don’t have to worry about reigniting inflation. And in that case, we will reshore, we’ll reindustrialize. All of that becomes achievable. It remains a plausible, but I think a far from certain, outcome.
Kevin: So, if that doesn’t happen, where are we as far as this balance of payments? Because we’ve talked about how the dollar recycling has turned into gold recycling, and it has something to do with this.
David: Yeah. I mean, what seems much less debatable is that today’s global economic imbalances are approaching a breaking point. And it’s difficult to identify another major government attempting to address those imbalances as directly as the Trump administration. Reading through Pettis’s article, he basically said the Chinese officials are saying it’s not their problem and it’s not their policy choice that’s causing these imbalances. It’s US consumers consuming too much. The US consumer is consuming too much of what? Chinese goods. Other things too, but I mean, it’s one thing to push the blame away. I think this is again where you see the Chinese are not addressing this issue head on.
The Trump administration, for all its foibles and frailties, for all the things that you can throw at them in terms of criticisms, they are directly trying to address the imbalances. I think it’s a low probability event that it works. Its strategy so far has relied on tariffs to alter trade incentives. Simultaneously, they’re seeking greater control over strategic natural resources. It certainly was a part of the play in Venezuela, might have been a part of the play in Iran—if not control, then influence.
I think that Trump and Bessent appear to believe that lower interest rates would materially improve the chances of implementation of their industrial policy.
So cheaper capital reduces financing costs for manufacturing investment. It eases the government’s own debt burden. Everything can be done with cheap money.
Kevin: Yeah, but cheap money is inflation. How do they do this without higher inflation?
David: Right. And that’s the question. Do you add fuel to the inflationism fire at this stage in a market cycle, and what risks are you taking in doing so? Whatever good is felt, whatever benefit is dealt out from an increase in asset prices, we’re already in bubble territory. And in some segments of the financial markets, you could describe it as a super bubble.
Kevin: So you lower interest rates in this environment, Dave. How do they do that?
David: Yeah. The challenge is that pursuing lower rates during a period of persistent inflation, that’s the dangerous part, because unquestionably it’s supportive of asset prices, but it risks undermining inflation credibility.
And this is where I don’t know that Bessent and Trump are going to get what they want from the new Warsh leadership at the Federal Reserve. Listening to Kevin Warsh last week, one could reasonably conclude that preserving the Federal Reserve’s credibility on inflation is his foremost priority.
If that’s correct, Bessent and Trump may not ultimately receive the monetary policy support that they’re hoping for. And I think they probably need that monetary policy support to have an odds-on chance of winning in terms of their policy implementation.
Kevin: So let’s talk about the increase of the use of the yuan over the last few years. I mean, 15 years ago, world trade, cross border trade with China was zero in yuan. They just had their own currency within their own country.
Now I think it’s up to about 8%, which, what is that? A 4X increase from what it was just a couple of years ago. Petrodollar, the same thing. The dollar used to buy all the oil. Now, what is it? About 20 or 25% of the transactions are in other currencies with oil. So how does that affect it?
David: Yeah. There was an interesting article from the Financial Times this last week titled “Why Sinodollars Outweigh the Petroyuan.” And they’re making the case that, look, we’re not going to see the same kind of thing that happened with the US dollar becoming the petrodollar. It’s not going to replace the US currency as the reserve currency. The authors contend that China’s persistent trade surpluses prevent the renminbi from becoming a true reserve currency.
And so under the logic of Triffin’s dilemma, reserve currency issuers must supply liquidity to the world by running persistent trade deficits. And that’s something that China has consistently refused to do. The policy choice was surpluses. You can’t be a reserve currency unless you’re running deficits. That’s the old Triffin dilemma logic.
Kevin: Okay. But bring in Jeff Curry, because this brings the gold side of it in it. They can actually continue to run surpluses and do international trade with the yuan if it can be converted to a neutral currency like gold.
David: Yeah. So there is an appeal to being able to dismiss the Chinese currency as running in competition with the US dollar—the loss of hegemony and the dedollarization trade and the concerns around the dollar losing reserve currency status and what does that mean for US investors and consumers?
If you look at the reserve currency through a different lens, there is a possibility, and I think this is what Jeff Curry was getting at. Gold recycling allows for a neutral reserve asset in the settlement of trade, and it does not have to be recycled into whether it’s the US dollar or in this case into the yuan or RMB, which would increase the value of their currency and make them less trade-competitive. So today somewhere between a third and half of China’s exports are settled in renminbi.
That creates what the Times article was describing as sinodollars.
Conventional assumption is that the renminbi serves as the natural repository for China’s trade surpluses. Yet Beijing’s capital controls and exchange rate management make the currency poorly suited to becoming the world’s dominant reserve asset.
They need to keep a lid on the value, and where gold enters the equation, I think, is where it gets very interesting. Rather than forcing China to abandon its surplus-driven economic model, excess trade balances could increasingly be recycled into gold.
Net trade imbalances could then be settled in ounces of gold rather than through continual accumulation of dollars or a broad internationalization of the renminbi.
Kevin: So basically that’s the cure for Triffin’s dilemma with China.
David: Yeah. A framework like that would allow for China to maintain its export surplus without placing sustained upward pressure on its own currency.
At the same time, it would gradually reduce reliance on the dollar as the world’s sole settlement asset. So this suggests kind of an intriguing possibility. Diminishing the dollar’s role in global trade—again, we think about gold as a reserve asset, but this is really thinking about currencies and the trade functionality—diminish the dollar’s role in global trade does not necessarily require the renminbi to replace it one for one. Instead, a growing share of net settlement could migrate to gold reserves held by trading partners. In that framework, gold functions not as a currency but as the neutral reserve asset that clears persistent imbalances between nations.
Kevin: Yeah. So it’s an exchange out of the currency. So when a country’s paid in yuan or renminbi, it can be exchanged then for gold, and then it becomes an internationally traded currency just like the dollar was—where the dollar was for decades.
David: Without creating undue pressure on the currency itself, requiring extreme manipulation to keep a lid on it and not requiring them to compromise on their policy choice to run persistent surpluses.
So the question worth asking is whether China is in effect attempting to solve Triffin’s dilemma, not by internationalizing the renminbi, but by increasingly using gold as the ultimate settlement mechanism.
So the gold story is still being written. When we think about current volatility, these are massive structural shifts in not only the world of reserves but also the world of trade. And this story has a lot longer and a lot farther to go, driven by reserve dynamics, driven by trade dynamics, driven by financial market dynamics, public policy dynamics, but both here in the United States and abroad.
Kevin: You know, Dave, before we finish up today, we are at our country’s 250th anniversary, and it’s an amazing country. You were telling us a story this morning, just talking to your family, and encouraging all of us to tell the story of this amazing country.
So you and I talk often about various things that might be vulnerabilities in this country, but there’s still nothing like this in the world, is there?
David: We’re celebrating the 250th year for our country. This is a special week, a unique 4th of July. I think the enduring legacy of the United States is not simply that over that 250-year period it became the world’s largest economy, or it became the issuer of the reserve currency to the world. Its greatest legacy has been that the creation of an institutional framework that consistently transformed freedom into opportunity.
For those who think we have an immigration problem, who wouldn’t want to be here?
Kevin: Right.
David: There is a reason people want to be here and not someplace else. Has there ever been a place at any time in history that has harnessed the ability of ordinary people to create extraordinary wealth and promote human flourishing?
You can look at other periods in history and there was vast wealth, but it was not the ordinary person who had opportunity. It was only the well-connected.
Kevin: It was royalty and family names. Yeah.
David: Throughout our history, it’s immigrants, it’s entrepreneurs, it’s inventors, it’s investors. They have all found a country where success depended less on family lineage than on talent and on hard work, willingness to take risk.
And I think behind that, the deeper legacy is a society that combined liberty, property rights, entrepreneurship, scientific curiosity, relatively open markets in an extraordinarily powerful engine for human growth.
Kevin: And there was a deeper, deeper philosophical backbone to this country that had to do with values and goodness.
David: Yeah. I think that’s where sometimes, whether it’s in the Commentary or just in conversations reflecting on what was versus what is. Today we could look at this as an era of fiscal deficits. We can focus on political polarization. There is clearly declining trust in institutions. There’s a growing sense of entitlement.
I think it’s easy to forget or to overlook what has made us great as a nation. My dad used to quote, I think it was Aleksandr Solzhenitsyn, and the quote with something like this, “America is great because she’s good. And if America ever ceases to be good, America will cease to be great.”
So, to our deepest legacy, we see it is based on values which have dignified every person, uplifted the downtrodden, protected the innocent and the vulnerable, and our greatness stems from values which, if forgotten, if neglected, will write the last chapter as tragedy.
And if they’re remembered, if they’re elevated, if our stories are told, we’ll extend our story another hundred years or 250 years.
Kevin: Yeah. So happy 250th.
David: Happy 250th. God bless America, land of the free, home of the brave. I’m grateful to have been born here.
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You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick along with David McAlvany.
You can find us at mcalvany.com and you can call us at 800-525-9556.
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This has been the McAlvany Weekly Commentary. The views expressed should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional financial advisor to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany Weekly Commentary.
