Podcast: Play in new window
Gold and silver appear to be reaching a major inflection point as central banks continue their aggressive accumulation of gold. While general investors have been slow to follow, that may be changing as confidence in paper assets begins to weaken. This week, David McAlvany looks at the tech stock melt-up, why it may be running on borrowed time, and what a shift in investor psychology could mean for precious metals. He also revisits 1971, a year that reshaped money, markets, and, surprisingly, Starbucks coffee.
- As Central Banks Continue Their Voracious Gold Buying, General Investors Will Follow
- Tech Stocks Melt-Up Is On Borrowed Time
- 1971: A Big Year For Starbucks Coffee And Gold
“But if we replicate the scale of the 1970s—two-wave inflation cycle, double-digit inflation, higher in the second wave than what we had back in 2022—peak levels should arrive by 2027, and we were 8%, 9%. Wouldn’t surprise me to see double digits. And I mean, we’re talking CPI. Yes, they’re understated, but they’re still going to say we’ve got an inflation problem. So, Kevin Warsh, who was quoted recently, is saying inflation is a choice. And he may, now that he’s in office, want to qualify that with something like ‘inflation was the choice.‘“ —David McAlvany
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Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick along with David McAlvany.
David, it was a great weekend. You’ve got your second graduate out the door. It’s pretty exciting. Your eldest graduated a couple of years ago and now your next one, and you’ve got two more coming.
David: That’s right. It means that 2027 is going to be this thrilling year of paying double tuition. The first in a series of double tuitions. Really excited about that. I’m glad that the cost of university education is on the decline. And one of the things I love about pricedingold.com is that it does put things in perspective. I don’t feel so bad.
Kevin: Have you checked how—
David: Oh, yeah. No, I mean—
Kevin: —education relates to the price of gold?
David: My kids aren’t going to Yale, but if they were going to Yale, that’s kind of the benchmark for an Ivy League, very expensive education. It’s about the cheapest it’s ever been priced in gold.
Kevin: Priced in gold. Yeah.
David: The value of savings, the value of reserves actually becomes very relevant when it comes to paying bills.
Kevin: If coffee beans would last, I think coffee beans would actually probably do the same thing. We’re talking about going to Starbucks. You went with your family, and I think it cost you over 40 bucks.
David: Unbelievable.
Kevin: You know what? Starbucks started in 1971. What also happened in 1971?
David: All right. We’ve got the closing of the gold window in ’71, the opening of the Starbucks store there at Pike Place. It was such an auspicious year.
Kevin: You know, coffee at that time was 25 to 30 cents a cup. Starbucks was selling just beans at the time, not actually brewing it.
David: I didn’t get out for less than five bucks a pop.
Kevin: That’s amazing.
David: Yeah, it was amazing. Amazing, not in a great, exciting way.
Kevin: Aren’t you glad, though, that your dad taught you to put yourself on a gold standard when the United States went off the gold standard?
David: Absolutely.
Kevin: Yeah. Now a coffee bean standard smells a whole lot better. I smelled the coffee before you came in the studio here as you were brewing it, and it got me going.
David: We went to, this weekend— Super busy, fabulous weekend. We spent some time at Santa Rita Park, which here in Durango is where they put up all of the flags—
Kevin: That is so impressive.
David: —on Memorial Day. And never a year that we miss it. Never year I don’t get choked up thinking about the sacrifice that men and women have made through time, and that was a part of the weekend. Another part of the weekend was going to a one-year-old’s birthday party, and I got to give him his first ounce of silver. He was pretty excited about this.
Kevin: Well, I wonder what silver will be when he hits the time to go to school.
David: I know. Well, I thought about— Good family friend. Maybe for the first 10 years give him the number of ounces by the years that— And I can do it today, but I don’t know. I mean, if we go out to 2028, 2029, all of a sudden, I’m making a commitment to his college fund.
Kevin: Well, we were talking about inflation, and we’re talking about going back to the 1970s. I was talking with a client the other day. We both were reminiscing about the oil crisis back in the 1970s. And we were just kids at the time, but we remember the lines. We remember a lot of times these gas stations would close up early because they had just limited amounts. Let’s talk about oil and the Strait of Hormuz because the 1970s in many ways should have taught us some lessons about today.
David: Fast changing in terms of a topic, things are always changing with the oil market. These days, it is kind of a weekly pattern. World is moving towards greater conflict on Friday, but by Monday, things are fairly well resolved and peace is emerging. Oil ended Friday—traded before that long weekend—to $104 a barrel. By Monday, with another promise of a ceasefire extension or some version of conflict resolution, oil trades to $94 a barrel.
And what the market has yet to figure out is that supply and demand fundamentals are lining up to keep prices elevated for some time. So, we could see a relief sell off. It’d be no surprise. But we’re working through our reserves. We’re working through the oil supplies that were in transit prior to the conflict.
Kevin: So, let me ask you that, though. Okay. Let’s say that everything ended today. Is that going to just cause oil to go straight back down or are we getting to the point where the conflict doesn’t matter as much anymore?
David: What’s been kind of covered up, not deliberately, maliciously in any way, but you can ignore what’s happened in the oil markets to a certain degree because there’s been plenty of oil in the pipeline so to say. But we’re edging closer to a day when the end of the conflict won’t matter much for oil, particularly for refined products like diesel and jet fuel and gasoline, because it’s a supply chain issue. We’ve been out of the market with new product filling that supply chain for a long enough period of time to really matter.
So, adjusting for the flows that Mideast producers redirected to pipelines and away from the strait, which would have been sort of 20 million barrels originally. And by the time you get some of the redirect, about 15 million barrels per day remain affected compared with, again, the roughly 20 million originally cut off from the transit around that Hormuz choke point.
Kevin: How does that relate to the 1970s like we talked?
David: Well, this is roughly 15% of global supplies which remain affected. That’s three times larger in absolute terms than the 1970s—twice as large relative to the global oil markets, if you’re comparing it to the 1973 oil embargo. This is a real energy crisis. It will have a lingering effect in terms of inflation. The total lag between production at the wellhead to delivery of a refined product at the pump in demand is about 90 days.
Kevin: Wow.
David: So, the inventory quite literally in the pipeline has not yet been exhausted. So, what you’ve seen is a pricing in the futures market and a reaction to the cut in supplies, but we’re still working through what was already in line to be used.
Kevin: We’re still within that 90-day period from the beginning of the war, aren’t we?
David: Yeah. If we ended the conflict today, the gap in product production through the supply chain to the end market, it’s been created by, what are we now? 89 days, sort of an 89-day cessation of flows.
Kevin: Right. And you say it takes 90 days to get here.
David: Takes time for that gap to be refilled, and that’s when flows resume. We’ve substituted oil supplies with strategic petroleum reserves, roughly four million barrels a day. That only offsets about a third of the oil previously transiting the strait, and that’s been an issue to consider as you go forward. The drain from strategic reserves will need to be replaced at some point, which you could estimate creates an additional demand for about a million barrels a day, and that would last over several years, that uptick in demand, just to replace the SPRs.
Kevin: Isn’t it amazing? It feels like yesterday that we were sitting right here in this studio talking about how oil, the price of oil, had gone negative. You remember that? That was five or six years ago when they could not offload oil without paying 40 bucks a barrel, if I remember right, something in that neighborhood.
David: Yeah. I remember a wealth management meeting, one of our analysts at the time, Lila Murphy, she said, “We’re going to see oil trade negative.” And this was about 45 days before it traded negative, and—
Kevin: Really, Lila predicted that?
David: Yep. I think we’re closer by the day to the inverse of April 2020 when Cushing crude traded those negative numbers, there was too much supply, nowhere to put it, and with nowhere to put it, people were—
Kevin: Negative.
David: That’s where you went—
Kevin: They had to pay you to take it off their hands.
David: So, this is kind of a mirrored market with the opposite dynamic, too little supply, too low a level in the production process. The high-side estimates are about a billion and a half barrels removed from the normal step sequence. Again, that step sequence from the wellhead through pipes and chips and everything else, through the refining and finally to the end market distribution. Factoring in the supplies already in motion, the actual disrupted barrels are about 600 million barrels.
And in the same process, you’ve had the Chinese who’ve basically said our refining capacity is going to be for domestic purposes only. Our exports of refined products were curtailing, and so regional distribution has been very much impacted on that basis with the mainland kind of hoarding, so to say.
Kevin: I know that you and the folks that are making investment decisions for McAlvany Wealth, you guys are continually looking at what the estimates were. And before this conflict, the estimates were that there was going to be excess oil, not deficit oil. Is the conflict the only thing that’s causing this, or were they just wrong?
David: No, I’ll get to that in a minute. June 17th, we’ve got a public webinar for our asset management group. We’ll cover where the precious metals markets are, the broader commodities market, discuss our thesis—the hard asset thesis—a bit, and review the things that are working currently and the things that are not working currently, and it’s a great way to kick the tires. If anybody’s interested, you can register. We’ll certainly have more opportunities to do that—a landing page and things like that as we move towards—
Kevin: Mid-June, you said.
David: June 17th.
Well, prior to the conflict, Wall Street was convinced by the IEA’s estimates that we were going to have two to three million barrels a day in surplus—
Kevin: Surplus.
David: —this year, and so a lot of softness in the oil price. I mean, we’re 58, 60 bucks a barrel before the conflict, and that continued to weigh negatively on the price. The assumption was, that would carry us through the end of 2026. As it turns out, there are two ways of looking at these statistics and a far greater likelihood that that surplus was modeled incorrectly, and we’re actually, by the end of this year, going to be looking at a two million barrel per day increase in demand globally. So, they were focused on the supply side, and there’s some question as to whether or not they counted it right.
An increase in two million barrels a day in demand—suggesting a deficit, not a surplus—that would bring total demand towards about 107 million barrels a day—again, by the third or fourth quarter. That’s the opposite of the IEA’s analysis, which was serving as the underlying bias amongst traders and investors prior to the conflict.
Kevin: Talk about being caught off guard.
David: What we’re likely to find post-resolution is that demand is stronger than modeled, which I think ignores the elephant in the room, which is US shale.
Kevin: So, let’s go there because during Trump’s first administration, US shale took off, and it really did affect the whole supply/demand equation. Right now, tell us about shale.
David: US shale basins other than the Permian have already registered declines. Then you look at the Permian, and the growth rate of production has declined, but it hasn’t yet turned negative.
Kevin: So, it’s still growing, but it’s not as much?
David: Right. So, the decline of the Permian production growth, it was a million barrels a day. That was the growth rate, and it was about 100,000 a day as of February. And I think that’s important to keep in mind because shrinkage in growth becomes critical to oil market pricing when you have that production flip to outright decline.
Taken together, I think we have a setup where a post-conflict— Again, I don’t know if we resolve things today or 60 days from now or what happens, but assuming that we are post-Iran conflict, shortly thereafter I think you’re going to be surprised by a resurgence to $100, $150 a barrel.
There is a long-term bull market in energy which is still emerging, which of course feeds into a broader inflation problem.
Kevin: Over the last year you’ve talked about how inflation comes in waves. We saw that in the 1970s in a dramatic way. It can be very high inflation, then it looks like it’s going away, and then come back in like a larger wave. Right now, energy could be the factor for this second wave.
David: Yeah. Inflation is having a second wave, and we talked about that maybe mid-year last year. There was less concerns about inflation, not a big deal, and the conversation swirled around what happened in the 1970s, where your first wave was basically done by, if I’m remembering correctly, maybe ’76. And then it faded for about two years, normalized, no more concerns, and then back with a vengeance ’78 to ’80.
Kevin: Yeah.
David: And the second wave took it to a higher number. Of course, rates ultimately had to follow, and Volcker not only raised rates, but he also had to tighten lending considerably. And it wasn’t until he restricted or tightened financial conditions that you began to see inflation ebb.
There is this conception that you raise rates and that’s going to solve the inflation problem. The bigger concern—the bigger tool, better tool—is to squash commercial lending.
Kevin: Well, and you think about it. Back when Volcker did that, when he raised rates, we had $1 trillion in US debt. Now it’s close to 40 trillion. We can’t pay the interest. Oh, you could not have another Volcker move.
David: That’s right. So inflation was already ticking higher prior to the conflict, and now there’s an embedded pressure from the energy markets gradually getting priced in. So first we had PPI. We talked about that last week. And PPI is your wholesale inflation number. That ultimately gets passed along to the end consumer. We usually see CPI and PCE—the Fed’s preferred measure of inflation—they’ll have an uptick after the fact. So PPI first, then CPI and PCE.
Kevin: And they’re normally understated anyway.
David: Notoriously shy in really reflecting the manufacturers’—or the producers’—reality, and of course the consumer’s direct experience as they go buy stuff. This weekend, again, we were headed to that memorial, and everybody was like, “We need a coffee before we go.” “Okay, fine. Where do you want to go?” “Starbucks,” which—
Kevin: Your favorite place.
David: —baffles me. So we’re out the door for 40 bucks. And that’s coffee.
Kevin: You don’t even like Starbucks coffee.
David: No. For six of us, it’s 40 bucks. And it was like the McDonald’s, we don’t eat at McDonald’s very much either, but McDonald’s, 65, 70 bucks, which recently was— How do I categorize this as fast food? I mean, it wasn’t that many years ago—
Kevin: It’s not fast either.
David: No.
Kevin: Have you noticed? It’s not fast and it’s not cheap.
David: That was like mid-tier bumping into fine dining. Now it’s a couple of burgers, crazy fries. Granted, their fries are the best in the world.
Kevin: I see, you don’t like Starbucks, but you do like McDonald’s fries.
David: Fries.
Kevin: Yeah.
David: Fries.
Kevin: You’re getting me hungry.
David: Well, who was the gal who sort of popularized French cuisine?
Kevin: Julia Childs.
David: Julia Childs.
Kevin: Yes.
David: It was her claim that McDonald’s French fries were the best in the world.
Kevin: Really?
David: And I have to agree. And I’m also married to a woman who obsesses about French fries.
Kevin: She doesn’t look like it though. Yeah, you need to understand, for the audience to know.
David: For which I’m grateful.
Kevin: There we go.
David: But no, I mean, she ran away from her mother at age three in a Target back when they had the food court in Target, and she’s standing at the edge of a table begging for fries. They did the whole amber alert thing, shut down the store, and found her, and this guy is like, “I don’t know if I’m supposed to be—”
Kevin: If she goes missing, Dave. I’m just telling you, you know where to look.
David: I know. The only thing that’s changed is it’s no longer the food court. She’s looking for truffle fries or something more bougie.
Kevin: Well, okay. So Starbucks, you don’t care much for Starbucks. You paid 40 bucks for it though.
David: Well, the fact that the family thinks that Starbucks is great coffee, that’s unbelievable to me.
Kevin: How many got coffees? Five or six?
David: Six of us.
Kevin: Okay.
David: So I’m an espresso guy.
Kevin: 1971 at a quarter a cup. If you would have just taken that family in 1971 to a coffee shop.
David: I don’t think there was anything on the list for like, less than five bucks, 5.65.
Kevin: Isn’t that amazing?
David: Of course, I mean, it’s my 12-year old’s asking for a mango matcha and I’m like, “What are you at? What? A what? ” I used to order horchata espresso with vanilla foam. That’s from somebody in the backseat. I’m like, “What is this? “
Kevin: You’re drinking an espresso while we talk.
David: Absolutely. Absolutely.
Kevin Orrick
But it ain’t Starbucks.
David McAlvany
So I still order a small or a medium. I’m somewhat offended by the nomenclature.
Kevin: Oh, you don’t do the tall thing?
David: Tall, grande, vente. I purposely resist. I feel like I’m caving. What size would you like? A small please.
Kevin: You go in to teach Starbucks a lesson, don’t you? Yeah, you’re going to teach those guys a lesson.
David: But if we replicate the scale of the 1970s—two wave inflation cycle, double-digit inflation, higher in the second wave than what we had back in 2022—peak levels should arrive by 2027, and we were 8, 9%. Wouldn’t surprise me to see double digits. And I mean, we’re talking CPI. Yes, they’re understated, but they’re still going to say we’ve got an inflation problem. So Kevin Warsh, who was quoted recently, is saying inflation is a choice, and he may, now that he’s in office, want to qualify that with something like, inflation was a choice.
Kevin: Was a choice. Yeah. He’s caught between a rock and a hard place. So many people right now are waiting with bated breath on the outcome of negotiations. And you were talking about $104 oil last week dropping to 94 just within one trading day. Is it going to make much difference? I mean, like the end of the war. Let’s say the United States makes a deal and it doesn’t involve the uranium. Not everybody’s playing on that.
David: Well, yeah, getting a deal between the US and Iran is one thing. Getting Israel to sign on is the real wrinkle. It’s very unclear that ending the war just in order to enter negotiations for peace is even a realistic sequencing. It seems like you negotiate the peace and then you say, “Okay, the war’s over.” You can’t say, “The war’s over, now let’s negotiate the peace.” In essence, we’re giving up leverage at the outset of the negotiation.
Kevin: Why do you think that’s happening?
David: I don’t know, but it doesn’t convey the normal art-of-the-deal style, which you’d normally see with Trump.
Kevin: You think it’s election year?
David: It seems to me that inflation and the midterms are driving the White House agenda more than a realistic settlement with Iran, which is a strong reason for Israel to separate out its interests from those of the US. You mentioned Uranium. Uranium is a primary concern for Israel.
Kevin: Sure.
David: Iran can’t keep it. But for the US, we’ve shown that it’s negotiable. Now it wasn’t negotiable 80 days ago. I mean, if you look at the mandates of “we need to see total capitulation, we need to see groveling, we need to see confession of all of our venial immortal sins.” The Iranians needed to basically— What was his language? Total capitulation.
Kevin: Total capitulation. Yeah.
David: And that— For us, uranium was not going to be a negotiating point. Now it’s negotiable for us. Not so for Bibi—Benjamin Netanyahu. So how the next 30 to 60 days unfolds, I think we see assassinations, we see missile strikes, we see other proactive measures from Israel. Those are all highly probable. And of course Iran will take exception to that being an Israel issue distinct from a US-driven ceasefire, a negotiation process. The US and Israel came into the conflict together, and they won’t be seen as distinct operators going forward. So as we see the separation of strategies, it’s going to be complicated. And I think it’s going to put strain on the US-Israel relations, that there will be more and more jeopardy there as Bibi acts in Israel’s interest and Trump acts in the interest of the party ahead of the US November elections.
And I think there’s some irony in that because if you look at why we literally put the screws to Reza Pahlavi and brought in Khomeini back in ’79, Khomeini basically said, “We’re building a national rail. I’m putting in infrastructure here that is good for us. These are my national priorities.” And the US said, “Yeah, we need you to focus on X, Y, and Z.” And he was like, “Sorry, my country, my people, our self-interest.” And we’re like, “Okay.”
Kevin: So we helped overthrow the Shah and put Khomeini in. And then he did not play.
David: And it was because he prioritized national interests. And I think this is again where we don’t conceive of a world in which people prioritize their national interests. They are expected to kowtow. They are expected to supplicate and show us some respect. It’s our decision for your best interest. That’s so funny.
When you experience that kind of presumption, it is gravely offensive. I remember back in 1999 before I got married, there was a family friend and he pulled me aside and he’s like, “Look, whether it’s life experience, I know a lot about a lot and you need to trust me on this decision. Don’t marry this girl.” I’m like, “So I’m supposed to take everything that I know and set it aside because you have a greater abundant wisdom and I just need to go with what you—” I’m like, “I don’t think so.” This guy’s life has gone on to be an utter train wreck.
Kevin: 26 years later, you and Mary Katherine are happily married.
David: But the way he saw himself, he was like, “I’m older, I’m wiser. Let me make this decision for you.” And I think back to how that plays, and in international relations, it doesn’t matter if it’s one-on-one with two people or on the grand chess board. There’s a certain point where it’s like, no, we will do what is in our best interest come what may.
Kevin: Well, and what you’re talking about is Israel will do what is in their best interest. Iran will do what’s in their best interest. Trump may be doing what’s in his best interest for the elections, but we can’t trust the long-term outcome on this even if it’s announced today.
David: Yeah. So Bibi acts in Israel’s interest, Trump acts in the interest of the party ahead of the US November elections. We need this war to end now because we need inflation to end now so that we have a great narrative, which is: we’re doing everything that we can to bring peace to the world—sign me up for the Nobel Prize next year—and inflation’s not an issue; and look at the stock market, it’s booming; and you should vote for me. So we’re in a time crunch now. This is a political time crunch.
Kevin: Well, okay. So equities, you brought up stocks. Technology is skyrocketing, Dave.
David: Yeah, but it’s not an even playing field. A couple of observations, equities and bonds, breadth is a term we often use.
Kevin: How many people are buying versus is it narrow?
David: It’s a reference for the measure of broad-based participation. That’s what you usually see in a bullish move. The broader the participation, the more companies that are all doing well, the better. The narrower the list of names participating in a move higher, the more precarious that move is.
Financials have not participated in this recovery move. And I think it’s also notable that the equal-weighted indexes are underperforming the capitalization-weighted indexes. Year to date, if you look at the triple Qs or the NASDAQ, it’s up 17% versus the equal-weighted NASDAQ, which again is all the dollars spread out amongst all the constituent parts versus just with most of the money flowing to the top names based on their size and capitalization. So 17% for NASDAQ, 7% for the equal-weighted. The S&P equal-weighted versus the cap-weighted—it’s a narrower—spread, 200 basis points.
Value line and the New York Stock Exchange index that, again, 400 basis points, 300 basis points underperformance versus the cap-weighted S&P.
Kevin: Well, when I look at an index, that’s what I’m expecting is more equal-weighted.
David: It’s not how it is structured.
Kevin: Most people don’t realize.
David: No, that’s not how it’s structured. When capital flows into the stock market, the primary indices are cap-weighted, capitalization-weighted. And so if you’re in the top five, you’re getting most of the capital flows to you, and it exaggerates your move even more. And if you’re at the bottom of the list, if you’re the S&P 500 and not the S&P one through five, if you’re the last on the list, you’re getting scraps, thrown a few pennies while the billions are flowing to the big names.
So the action’s been in tech, and that’s where the capital is continuing to flow. Obviously semiconductors a huge part of that. Semiconductors, the SOX index, up 87% year-to-date. That’s 87%, actually, in eight weeks, not year-to-date. That’s child’s play compared to Micron, up 168% since the March lows, and 200% year-to-date. Western Digital, Seagate, those are some companies that I usually follow for the extreme market volatility. If you want to see companies that can go up 200% and then give up the ghost and decline by 70, 80, 90%—
Kevin: You’ve been through this before.
David: Yeah.
Kevin: You were a stockbroker back in the late ’90s, early 2000s.
David: I’ve made money shorting Western Digital. I don’t know that I would short it today. We’re in a market melt-up.
Kevin: Yeah.
David: But Western Digital, Seagate, similarly up 200%. Sandisk a real standout. It distinguishes itself with a 560% year to date gain.
Kevin: Well, good for them. Yeah.
David: But I’m guessing that trend within tech is seen as more sustainable. If you took a straw poll, asked individual investors, where do you want money to be? Are they going to choose gold or are they going to choose tech? They’ll see the tech trend as more sustainable than the secular bull market in gold.
Kevin: And you would see the tech side on borrowed time.
David: I would argue tech is on borrowed time. The AI revolution is real, no doubt. Long-term economic benefits are likely to accrue. But like with any innovation and technological development or change, you get overinvestment, you get mal-investment, which for our purposes are the same thing. And I would also argue that we are, with the other asset class in question, gold and silver, at an inflection point.
Kevin: So let’s talk about the inflection point because we’ve talked about how it’s the institutional investors, it’s central banks right now that have been driving this market almost completely. And what you’re saying is the inflection point would be that the public might actually start entering?
David: Yeah. I think the institutional baton is being passed to retail investors. And that’s not to say that central banks are done buying. Gold’s share of reserve assets has increased. In advanced economies, it’s gone from 17% to 25%. So there’s been a healthy increase there. Within emerging markets, your reserves have increased from 7% allocated to gold to now about 11%—10, 11%. What we’ve seen is the motivations shift. And as the motivations have shifted, the allocations have followed.
Again, we’re talking about, as we have in previous Commentaries, it’s the motivation for agency. It’s the motivation for: we want to choose our own course, and we don’t need the Treasury Department or the State Department telling us what’s best for us or what we will do.
Kevin: Or what we can sell our oil in, in the case of Russia.
David: That’s true too, or in the case of Iran settling those transactions in Renminbi.
Kevin: Yeah.
David: Yeah. I think if you go back in time and compare the central bank reserve averages today, if it’s 25% or 11%, depending on the development scale, the average, if you look at the previous peak, it was 62.4%.
Kevin: So we’re a long ways away from the old days as far as reserve percentages.
David: Yeah. And what has changed with this motivation is not only to own—and for a different reason now than why they were selling gold in the ’90s and 2000s—but this is not just a passive reserve. And I think this is a critical distinction. It’s not a passive reserve anymore. It’s a balance sheet tool.
Kevin: They’re treating it like currency.
David: It’s a balance sheet tool that offsets liabilities and insulates from those external pressures directed by Treasury and State. And so, as deglobalization picks up momentum, so does diversification of reserves to the only neutral financial asset. And so, as a means of trade settlement, gold is neutral. You don’t have to choose favorites. You don’t have to say, “Well, I guess we’ll settle in euros or renminbi.”
That implies a trust and a confidence level with those countries, their policymakers, and their currency, which frankly you don’t have to have. The nice thing about settling transactions in gold, or net settling in gold, is that I don’t have to trust the Chinese. I don’t have to trust the Russians. I don’t have to trust the Germans. I don’t have to trust the French. I don’t have to trust the Argentinians.
Kevin: Well, let’s go back to Europe in the 19— Well, let’s go back to the late 1800s. If you were a banker in Europe, Dave, you would balance your gold with your debt because balance of payments had to be made, ultimately, because gold was the standard. Are we seeing something similar to that where you need to now compare your gold holdings to your debt?
David: Yeah. If you see gold through the lens of not just a passive reserve but an active balance sheet liability management offset, I think it’s interesting because gold reserves acted as that counterbalance to our debt for a long time. And gold to US debt was 51% in the 1940s, and that’s after World War II. We had a lot of debt, but still we had even more reserves, and those gold reserves represented 51% of our liabilities.
So assets, liabilities, it was a healthier balance. And that number, by the time we got to the end of the bull market in 1980, our gold reserve represented an 18% offset, or balance, to our debt. Major move in gold, but guess what had happened in the interim from the 1940s to 1980? Our debt had started to move considerably higher.
Kevin: And gold went down.
David: Yeah. And today people would say, “Hey, gold is near all time highs.” Represents 3% of our liabilities.
Kevin: So in comparison to the 1940s, which we were 51%, it’s now 3%, our gold to debt.
David: Yep.
Kevin: Wow.
David: So to counterbalance our debts and improve balance sheet stability, if you just went back to the 1980 peak, that 18% number, gold would now have to trade at $26,000 an ounce.
Kevin: You’ve got voices out there, Dave, that say that ultimately is going to happen, just based on history. I’m not saying it will. Remember Jim Sinclair would talk about that?
David: Yeah. I don’t know if there’s any mechanism to that. It’s an interesting statistic, but I don’t think there’s anything causal or sort of magnetic about, okay, gold is going to be priced at this number because it has to. No, that means that policymakers acknowledge that they’ve got a problem. I think what we’re seeing with emerging markets is that they’re balancing reserves against what they consider to be a somewhat toxic asset.
And whereas US Treasuries used to be the benchmark for the risk-free rate. They used to be—because they’re the deepest capital pool in the world—a great place to hold your reserves. And because the US dollar is a part of global trade, central to global trade, you’re just going to keep those reserves. At this point—
Kevin: Well, then we weaponized it, and yeah, it’s like, why not step away? I mean, and going back to these price predictions, like $26,000, what have you, who cares? Okay. In the long run, it does not matter. We talked about Starbucks coffee, 1971, quarter to 30 cents a cup, and now, it’s four bucks a cup, and gold was 35 bucks an ounce when—
David: It’s five if you get vanilla foam on top, 5.65.
Kevin: These price predictions don’t matter. It’s a matter of how much the dollar devalues.
David: And ultimately for us, what gold buys for you or maintains in terms of purchasing power.
Kevin: Right.
David: So we are not the country adding to reserves. When we look at those statistics of central bank purchases, we’re not adding. We’re not seeking to escape the dollar-based system, but we may be preparing to revalue our reserves. The Shelton commentary, the Judy Shelton commentary about a 50-year bond, redeemable in gold, which basically is far better than a TIPS instrument. If you think about Treasury Inflation Protected Securities, the acronym for TIPS, you’ve got some implicit inflation protection when you’re buying that version of a Treasury.
But a gold redeemable bond, 50 year redeemable bond. Wow. We are setting up a framework. The conversation exists, and as we move closer to the 250th anniversary of our country, it’d be interesting to see if that’s the time frame to launch something like that. Of course, revaluing our reserves from $42.22, which is what we hold them on the books at, to a current market price, again, it helps the balance sheet.
But when we did something similar in ’33, it was also akin to— When we moved the price of gold from $20 and I think 67 cents up to $32.
Kevin: Well, and the thing is that was actually a devaluation.
David: It was a 41% devaluation.
Kevin: Yeah. Yeah.
David: So marketing to market and it being helpful on the balance sheet side, there is also this: well, what is it now? Are we—
Kevin: Look, my gold is up.
David: No. Your currency is down.
Kevin: Yeah.
David: Right. So that might send the wrong message. All through the 1990s and early 2000s, we had central banks selling their gold reserves, and just a fascinating pattern of selling and selling and selling and selling and selling. The trend changed dramatically in 2009. From 2009 to the present, central banks have been adding and adding and adding. They continue to add at a blistering pace, and essentially, they’re maintaining the floor.
That’s what they had previously removed. If you go back to the ’90s and early 2000s, a lot of the downward pressure in gold was because there was just this constant liquidation of ounces. And you might say, “Well, okay, that can happen again.” Yes, except that, different now, the environment we had then is the desire to move away from the dollar, and it’s not like they can in total, but if they can protect themselves from the devaluation of currency, that’s a great way to do it.
Kevin: Yeah. So the central banks were net sellers until I think 2008, and then that reversed after the 2008 crisis.
David: Became buyers in 2009 and it’s been consistent since then. But investors are gathering into the precious metals. And this is where I come back to, I think we’re at a transition point, or we’ve already gone past the transition point and this really defines the course of the next leg higher in gold. Investors are gathering into the precious metals. I think they will do so more aggressively in the years ahead with a focus on replacing bonds—mitigating equity market volatility that may or may not come into play.
We’ve discussed this notion of a crack-up boom. Ludwig von Mises suggested that with enough inflation, you’ve got investors who first resort to protecting their portfolios with something that gives them some inflation protection: equities. Now at a certain point, you get enough inflation and those companies can’t keep up. They can’t continue to reprice. There becomes a backlash, and of course they’ve also got balance sheet issues themselves, to the degree that you have higher and higher inflation, rates are moving higher and higher, they’re having to roll over their debt. That becomes an impairment in terms of their capital outflows.
So I do think that gold mitigates some equity market volatility, which may or may not be relevant—again, if we get a huge surge higher in equities—but there’s no doubt that when you look at the fiscal situation we have in the G7, broadly around the globe, there’s too much debt. I mean, it’s like global GDP goes up 100%, but global debt goes up 250 to 300%. There’s too much.
Kevin: We’re in a new paradigm. It’s a worldwide paradigm. I was thinking about this the other day when I was out running. I was thinking, every other inflationary issue worldwide wasn’t worldwide. It was always a country. It was localized. Now, what we have is we do have worldwide inflation. We have worldwide debt problems.
And so, I know we’ve quoted this before, Dave, but it really was significant that Mike Wilson of Morgan Stanley, who as a chief analyst coming out and saying it’s no longer the 60 [% equities]/40 [% bonds], you need to have 60 [% equities], 20 [% bonds], and 20 [% gold]. That was a big shift away from bonds. And when you’re talking about debt, there is too much debt. So bonds really are not the place you want to be, if you’re trying to be safe.
David: Yeah. He’s assuming the 60/40 portfolio is what most people have, and they should be reducing their bonds by half, but that’s not the way financial advisors operate. You take 100, subtract your age, so I’m 51. My ratio optimally should be, at this point because I’m now on the downhill slide, I should be 49% equities, 51% bonds. If I’m 80 years old, the way that a financial advisor does that math, I should be 80% bonds, 20% stocks to reduce the volatility in the equity markets because I have no time to recover. We go into a bear market and I can’t play the patience game because I’m running out of wick. This candle’s almost done.
Kevin: Right.
David: Right? So that’s why they shift the way they do. So you’re actually talking about Mike Wilson saying something incredibly profound, October of 2025. It’s time for a conservative bond allocation at 40% to be reduced by half. So what does the 80-year-old sitting in 80% bonds do? Should it be 40% or should it be the 20%? We’re talking about structural dynamics, currency dynamics, global debt market dynamics, which impair an entire asset class.
And stocks may do just fine, but bonds are going to get crucified on a cross of inflation. So this is the issue when you look at the next move higher for gold, it’s the conservative investor who wants to preserve value, who doesn’t like volatility, and is not inclined to go whole hog into stocks, and you’ve got no better options. Do you want to start trading foreign currencies? No.
Kevin: Remember when you introduced me to Barton Biggs’s book [Wealth, War & Wisdom], and he talked about stocks, he talked about gold, but he also talked about the 1920s in Germany. And what he showed was that even those stocks look like they were keeping up with inflation. They didn’t keep up even to a 10th of what actually gold did at that same time.
David: This is amazing. I told you I had the meeting with the foundation group the other day, and I mentioned the Dow/gold ratio, and there was this blank look on their face like—
Kevin: A thousand yard stare.
David: Yeah, “what is that? What are you talking about? What’s this relevant to?” Well, what’s relevant is you’re saying that gold is far too volatile to have in a portfolio and that you should own more stocks if you want to see, again, that this is for pension assets, this is for—
Wait a minute. You look at the Dow/gold ratio, and in nominal terms we’re four to five times higher—in nominal terms. To your point precisely, this is what we saw in Germany. It appears that stocks are outperforming, and yet when you factor in inflation, if you price the Dow in gold ounces, we’ve already lost 75%.
Kevin: Relative to gold.
David: We’re down 75%.
Kevin: In the last 25 years.
David: And a group that manages $750 billion is clueless.
Kevin: They haven’t seen it.
David: Clueless.
Kevin: Can’t see it.
David: No.
Kevin: Okay. But you’re saying the general investor is going to be coming in at this point.
David: Well, what we know now is that they’re underweight.
Kevin: Yeah.
David: The general investors are underweight hard assets. They have very light ownership in gold and silver, and we’re in a market, the precious metals market, which has very inelastic supply.
Kevin: Very thin.
David: Different than Nvidia and Taiwan semiconductors, you open up the Chinese market, you’re going to sell 50 billion more in chips and whatever else. You can’t do that with gold and silver. 3,600 tons, that’s what you get.
Kevin: What you got is what you got.
David: Right. You might have some recycling on top of that, but if you want to crank up mine supply, maybe you go from 3,600 tons to 3,800 tons. It’s not enough to matter. Supply inelasticity up against increasing investor demand when your cushion has already been removed as central banks have aggressively been buying the last four years, when investors take an interest, they’re going to find that the available purchasable gold and silver is incredibly thin. There’s just not much left.
Kevin: So let’s look at some of the other, what we would consider sophisticated, investors. You talked about the foundation. You would expect that they would know more when they’re managing billions of dollars. But how about family offices?
David: They’re not showing up.
Kevin: How much gold do they own?
David: They’re not showing up. When I say underweight, you’ve got survey data that shows 72% of global family offices, no gold exposure at all.
Kevin: Okay. So almost three quarters of the family offices don’t have any.
David: So you factor in the zeros, 72% that have nothing, into your average, and your average family office exposure sits at 2%.
Kevin: And that’s considered sophisticated investing.
David: Most sophisticated people are looking in the rear view in terms of performance. Just like the average investor is looking in the rear view, looking at past performance, which we’ve been told over and over again is no guarantee of future results, but that doesn’t matter. That’s not how we behave. Micron technologies is up 168%, give me some of that.
Kevin: Cocktail party bragging rights is what we invest in.
David: That’s right.
Kevin: Yeah.
David: Yeah. So private investors, if you look at the global mix of assets, 2.7% to gold, that’s versus the 1980 peak allocation of 8.3%. That’s as a percentage of all assets. So 2.7% reflects $321 trillion in global financial assets, and roughly 8.6 is privately held in gold. There’s more gold above ground, but you can’t access it either because central banks have it or it’s just buried in King Tut’s tomb. We like King Tut, by the way. He’s our vaulted mascot.
Kevin: He is the mascot. Yeah.
David: Yeah. I think we’ll get closer to 8.3% as asset prices fall and the total financial pie shrinks, but also because you see gold moving higher. And by the way, this is the same numerator/denominator issue we talk about a lot with the Dow/gold ratio, just on a larger global scale, not limiting it to the Dow. But again, if you juxtapose gold ownership versus total financial asset ownership, there’s a gross disparity here. We’re at 2.7. In the last bull cycle we got to 8.3. You try to squeeze some portion of $321 trillion into an inelastic market, and don’t be surprised if you have an exponential move in price.
Kevin: So let’s talk about inelasticity because a lot of our clients probably have no idea how many hours you’re putting into— If you were designing a theater, one of the main things you would design is fire exits. You’d have to try to figure out the flow to get people out of something. You’ve been spending a lot of hours and are hiring people to get us to have fire entrances.
As people are fleeing from bonds, as people are fleeing from stocks, talk about an inelastic market. You made the comment that a company actually like ours is in more distress when we’re in a bull market and we have too many people who want to buy. We have to design those fire entrances right now. I think people need to understand they better get what they need before the rush.
David: Well, so you describe it as a fire entrance. Whether it’s a fire entrance or fire exit, I think it taps something that’s visceral in nature, which is really the key driver of the gold market. It has been for several years, but it’s what brings us to peak pricing, which is still ahead of us. Trust is being repriced, and gold reflects that. So the erosion of trust is accelerating, and you can see it with national institutions, you can see it with monetary authorities, you can see it in geopolitical relations, you can see it at the front edge just now beginning in capital allocation decisions.
When you don’t trust government bonds, which are considered the safest fixed income on the planet, when you begin to see a decay in trust in government bonds, it’s sending a vital signal. Ignore it at your peril. So the trend for gold is tied to something as visceral as wanting to get out of a theater that’s on fire. You’re not asking questions, you’re just moving, and you’re moving en masse, and there’s a risk of being trampled. That is the government bond market over the next 36 months.
Kevin: So JP Morgan may have been looking a little bit toward that when they said $6,300 by the end of the year?
David: And for Mike Wilson, it’s not a question of price. He doesn’t care about price. He’s talking about a conservative allocation into something that is categorized in his mind as anti-fragile. Well, that’s the role that bonds have played in a portfolio. You’ve got very volatile stocks, and you’ve got very boring and very stable anti-fragile bonds, except in an environment where you’ve got rising inflation, rising rates, and a devastating performance setup for fixed income. So he’s ahead of the curve and feels no compulsion to give you a price.
Kevin: And probably mocked by the crowd because the crowd does not see this. When I talk to brokers, they’re still on 60/40, baby.
David: I talk to Morgan Stanley brokers, they’re like, “We don’t really abide by that.”
Kevin: He probably was on some bad juju that day when he said 60/20/20.
David: So if we hit JP Morgan’s year-end price target of gold at 6,300, the full year gain would amount to 45%. Bank of America’s low-end silver target is for 135 bucks. That’s a full year return of 91% from January 1 through close date at 135 bucks. That’s strong, yes. And more modest estimates from Wall Street firms draw down those performance estimates to 30% for gold, 50% for silver. And some investors view 2025 and the metals’ move as sort of the end of a bull market. Emphatically, I would say we are nowhere close.
Kevin: They’re missing it.
David: And again, you need to know who’s buying and how long the lines have been. Who participated to this point. Public participation has begun, but I think the best you can argue is that we’re just part way through that adoption cycle in terms of the general public.
Again, a percentage of assets, miners as a percentage of the S&P 500, gold is a percentage of the S&P 500. You’ve got so many technical points that are in the process, on the cusp of breaking out.
How does the week finish? I have no idea. I think we’ve got better clarity in terms of how the year finishes and how the decade finishes. But if you were to say, “Okay, this is 2026, how does the decade finish?” 2030? I think we’ve already covered the ground to 8,000 an ounce.
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You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick along with David McAlvany. You can find us at mcalvany.com and you can call us at 800-525-9556.
This has been the McAlvany Weekly Commentary. The views expressed should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional financial advisor to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany Weekly Commentary.
