Podcast: Play in new window
- If You’re Not Afraid, You’re Not Paying Attention
- We Are Halfway Through The Next Leg Up On Gold
- Financial Markets Are Divorced From Economic Reality
“There is increased awareness around the world about the increased political—international politics and domestic politics—economic and fiscal risks. And there’s an increased concern that it’s getting worse. There’s a myriad of factors that are causing people to, A) be concerned about the risks they’re facing today and the probability that the risks will be greater tomorrow.” —Jeff Christian
Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany.
David, our guest today, Jeff Christian, I have a personal memory of this. Almost 30 years ago, the Platinum Guild flew me out to New York to meet with Jeff. We were supposed to have lunch and talk about the gold market and the platinum market. That lunch never worked out. I met with his assistant, we had a great lunch, we talked about those things.
But as I was thinking about this interview, Dave, I was thinking of your dad starting this firm back in 1972, and then you’ve got other names, Jeff Christian goes back to the 1970s. It reminds me a little bit of the dwarves in Lord of the Rings, where you’ve got the Mines of Moria and the dwarves and all the history. This is an industry that really is generational, and the guys who are really committed to it, they’ve been around for a long time.
David: It’s fascinating to me that there are views of the commodity space which are somewhat derogatory if you’re talking about the folks on Wall Street today. There seems to be something that has become very pure, the math that allows us to make all of these decisions. And yet you go back a generation, and it’s not that math was absent, it was still there. There was still quantitative analysis, but people were connecting dots across the board.
So your Gary Cohns and your Lloyd Blankfeins and the folks that were running Phillips or started Glencore or Trafigura, these guys and gals are trading commodities and they’re interested in geopolitics, they’re interested in public policy, they’re interested in a lot of things more than just a mathematical equation or an econometric model.
Kevin: Well, and it seems to work.
David: And it does factor in, but again, if you think about the old ways and you want to go back to the mines, it’s different. It’s a different level of interest, a different kind of complexity. Math certainly factors in, but there’s more to the story. And I think that’s what I appreciate about the commodity space and about the gold space too. When you go back far enough, you find these folks who are interested in economics and geoeconomics and geopolitics, and that’s certainly the case with our guest today, Jeff Christian, who runs the CPM Group.
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Jeff Christian, thank you for joining us on the commentary today. We look at the gold, silver, and platinum yearbooks every year. We’ve been in the metals business for 53 years. We’ve done this podcast for 17 years every week, and I can’t believe that we haven’t had you on to talk about the supply and demand fundamentals. You’ve had a voice in these programs through the years, just from behind the scenes, because we find those yearbooks to be invaluable.
And for anyone who’s listening, who wants to dig into the fundamentals of the gold, silver, and platinum market. Those books are available. They’re available for 150, 200 bucks, and they can be found in the link provided in the show notes. Jeff, tell us about your history. J. Aron, the CPM Group, the Goldman Sachs Group, and surprisingly to some, the leadership at Goldman Sachs made their way through J. Aron, whether it was Gary Cohn or Lloyd Blankfein, give us some of your history and the history of the company.
Jeff: Yeah, sure. Okay. It’s funny because several years ago, somebody gave me a book that basically said the problem with Goldman Sachs— The book may have been titled The Problem with Goldman Sachs or What Went Wrong at Goldman Sachs, they blamed the rise of J. Aron executives as changing the culture at Goldman Sachs. Having been at J. Aron and then Goldman Sachs and watched the change in the culture, it wasn’t the rise of J. Aron executives within Goldman Sachs, it was a change in the culture of Wall Street at the time. And I watched, in the 1980s, a lot of executives at Goldman Sachs basically saying, “We don’t like the way the Wall Street culture is changing, and it’s affecting Goldman Sachs, and we’re worth a few million dollars already so we’re out of here.” And we had a departure of a lot of really good people.
But personally, I studied journalism and political science, specifically international economics, when I was in university. And I was very interested in how communist countries traded and how developing countries traded with transnational corporations, to use the phrases that we used back in the early to mid ’70s. And a lot of that was commodities oriented. I wanted to be a business journalist. After I graduated, I came to New York and I got a job at McGraw Hill in their industrial newsletter.
So I tried to start a newsletter on electric vehicles in 1978. I wrote a book on electric vehicles in ’79. I looked into a variety of other industrial newsletters, but I mostly was working with Metals Week and Platt’s Oilgram and Platt’s Natural Gas Weekly and Chemical Week in the newsletter. So I was doing a lot of commodities oriented reporting. And in 1980, I got tired of being at McGraw Hill and I got tired of being a journalist. It was a very interesting year for commodities, for gold, silver, platinum, oil in general.
And I remember saying to my wife that there was this company, J. Aron. J. Aron was relatively unique among commodities trading companies. In 1980, the commodities trading business was primarily standalone partnerships. And starting around 1980, 1981, you started seeing the creation of these financial supermarkets and stock and bond companies. Brokerage houses and investment banks started buying or merging with commodities companies. Philip Brothers, which was probably the world’s largest commodities trading company, took over Salomon Brothers at the time, 1981, and Goldman Sachs bought J. Aron and other commodities oriented trading companies were bought up by brokerage houses and investment banks.
But Aron was unique. It was one of maybe 12 large precious metals trading companies worldwide. They had a very big footprint in trading commodities—precious metals and coffee. And it had a research department that did basic data on gold and silver. Going around, getting to know refiners, producers, smelters, industrial users, purveyors of investment products, high net worth investors, and coming up with basic fundamental statistics on the supply and demand for gold and silver.
And I said to my wife, “There’s this company, J. Aron, and they have this research department that does basic research.” And they were producing, I think, three reports a year as opposed to where I was at McGraw Hill doing weekly newsletters and twice daily telexes back then. And I said, “I’d love to have the ability to study these things in greater detail and write more thoughtful, larger pieces.”
J. Aron found out I was looking for a job, called me up two days later because they found out on a Saturday. They called me up on Monday and said, “Hey, you want to take over our research department?”
I said, “Yes.” And several months later, I went over and started running their research operation. I added Platinum Group Metals, and in late 1980, early 1981, it was something I had been studying at Metals Week, McGraw Hill. And so I was running the commodities research group at J. Aron, and it’s very important because J. Aron and later Goldman are financial institutions. And as a research group within that, we got involved in a lot of transactions, and we got to see how commodities trade and how the metals move from a producer to a smelter, to a refiner, to a semi fabricator, to a fabricator, to a wholesaler.
So we got to know a lot more about how commodities actually transact, and that’s different from a desk analyst. Bottom line was late 1981, Goldman Sachs bought J. Aron. I became the head of the commodities research group at J. Aron, which was what had been the research department at Goldman Sachs. We were just merged into the investment research department at Goldman Sachs. I ran that from late 1981 into 1986.
By 1984, I started to say, as were a lot of Goldman partners, “Gee, I don’t necessarily want to stay here. It’s a nice place to work, but the culture’s changing.” And in addition to that, I had this view that research should be separate from trading and investment banking, that there’s an inherent conflict of interest in your research and your advisory services coming from a company that’s sitting across the table from you.
So I saw that Goldman Sachs was sort of hemming and hawing about its metals exposure. “Maybe we should never have bought J. Aron,” and I proposed in late 1984 that they let me spin off the research department. They could outsource their commodities research group to us. And they said no in 1984, but in 1986 they said yes. So we left as a group and we set up CPM Group to be an independent commodities research and consulting company with the understanding that, A) we were already sort of at the top of the game in terms of precious metals research.
But in addition to that, we not only had this basic fundamental group that went around and cobbled up the supply and demand numbers, as well as doing a lot of what was then novel economic and econometric research on the markets, but we also had this background in transactional activity. So we knew how to structure hedges. We knew how to use options for hedging for industrial and commercial companies, and also to use them for institutional and high-net-worth individual investors. So we had this financial expertise that was relatively unique for a commodities consulting company. We’ve been doing it since 1986.
David: We’ll have to talk another time. My oldest son is just headed off to college. His interest is in journalism, international economics, and he’s obsessed with all of the things that were near and dear to your heart and translated into your career. So maybe we can talk about a summer internship.
But let’s dive into economics and then move into the metals, particularly starting with fiscal policy and its contribution to inflation stimulus. Can we expect any moderation in the impact of fiscal policy in the years ahead and tie that to precious metals for us, if you would?
Jeff: Well, I’m not sure what you mean by moderation. We’ve had excessive stimulation on a fiscal policy basis since the late 1970s, early 1980s. It’s gotten excessive starting in the early ’00s around 2000, 2008, and it has gotten worse and worse.
We got up to a point where we were running, what, a 3.7 billion deficit in 2020. It’s down to only $1.4, $1.7 trillion, which is an obscene amount of fiscal stimuli still. But we’ve already seen a moderation, a sharp contraction in fiscal stimulus. That’s in the United States, but you’re seeing similar—or you have seen over the last three or four years—similar fiscal withdrawals, fiscal tightening in Europe, in Japan, in a variety of other countries. So you’re seeing less fiscal stimuli already, and that’s probably going to continue in the near term.
The problem is that it’s at such a large level, it’s got to go a long way to shift from being deficit spending to being surplus budgetary work. And we don’t see the political will, either in terms of the political and governmental leaders or in the voting public in the United States and in other countries. We don’t see the political will that existed in the ’40s, ’50s, ’60s, into the ’70s that would allow for fiscal imbalances, i.e. deficits, to disappear and turn into surpluses.
David: So if we just take the CBO’s numbers and assume that by 2034 we’ve got 50 trillion in debt, and those deficits have continued to run, we’ve compounded some negative numbers with the interest component being factored in there as well, what you’re saying is we may see it trail off a little bit, this deficit spending, but it’s not as if we’re moving into a new age of fiscal conservatism in DC. If that’s the case, what’s the impact from higher rates?
Jeff: Well, yes, it does talk about higher rates. And it’s interesting because we went to the zero interest rate policy around 2008, 2011 during the global financial crisis and the Great Recession. And in the early years of that zero interest rate policy, say 2009 into 2012, CPM Group was saying, “At some point, interest rates are going to have to rise and rise sharply.” But then we sort of rejigged our economic understanding, and we said, “Zero interest rates could last a long time, maybe a decade before interest rates start rising, and when they rise, it’s going to be a completely different economic and fiscal and monetary environment than we had prior to 2008, 2009.”
And it’s funny because a couple of years later, the Fed said, “Hey, zero interest rates can stay at 25 basis points perhaps for a decade.” And they were very low from 2009 until 2021, ’22, and now they’re starting to rise. And our analysis is that you’re looking at a third era of modern interest rate and monetary policy. You had this period that ended in 2007, 2008, where you had interest rates of, say, 5 to 8% normalized, which spikes up as high as 21% in 1980. But then you went into this extended zero interest rate policy period, and now you’re going into what we think is the third era.
We’re not normalizing back to pre-2008 monetary policy because the economy, both in the United States and on a global basis, the economic and financial and political structures are so radically different now that a lot of the monetary and economic and fiscal ratios and relationships that existed back then are probably no longer accurate indicators of what comes next. And the Fed has said this, as have ECB economists and others, we’re in a new territory in terms of monetary policy and interest rate policy, and no one’s quite sure how it is.
Now, we’ve seen interest rates rise sharply from 25 bps to 5%, 5.3%, whatever it is right now. But that 5, 5.3, that’s like the low end of the range of interest rates that existed from the 1960s until 2008. So yeah, interest rates have risen sharply. Interest payments and costs have risen sharply, but there is a lot of room to go, which is what you’ve been seeing on a real economic basis. For three years, people have been saying, “Oh, these high interest rates are going to throw the US and the world, or at least the industrialized world, into a recession,” and they haven’t yet. We do think there’s a recession coming, but they haven’t yet.
And the reason is that, yes, you’ve seen a very sharp increase in interest rates, but they’re still low by historical standards. And companies and consumers can live with 4% or 5% interest rates. Interest rates have to go a lot higher before you start seeing that pain.
And I will say this about the recession, because I mentioned that we do see a recession coming, most recessions are not caused by monetary policy. They’re caused by a combination of economic developments, fiscal policies, fiscal missteps, and political issues. It’s always a combination of things that cause a recession. That’s what makes recession so hard to project.
David: That’s a good segue to a question on gold. US Treasurys and gold, under certain circumstances, are seen as safe haven assets. Is it possible that fiscal mismanagement here in the US negatively impacts demand for Treasurys at a certain point, with gold playing an expanded role as a safe haven asset?
Jeff: Oh, it’s absolutely possible that that’s going to happen. It’s not happening right now for a variety of reasons, and one is, as you said, Treasurys are sort of seen, like gold, as one of the safest assets to hold. So what we’ve seen over the last year or so, despite what some gold promoters have been saying, the global demand for US Treasurys has actually risen, and offshore holdings of US Treasurys are at record level, something in north of $8 trillion. They were $8 trillion at the end of 2023.
The demand for Treasurys has risen. No one’s dumping Treasurys except maybe the Russian government because US Treasury bonds are seen as being less risky than the sovereign debt of any other country—or almost any other country—as well as corporate debt and private debt and all the other debt.
You have US federal debt now equivalent to somewhere between 100% and 120% of US GDP. But if you look at it on a global basis and you throw in private debt as well as other government debt, you’ve got like a 300% debt-to-GDP ratio. And most of that stuff has a worse credit rating than the US Treasury. So total sovereign debt, I think, is $91 trillion.
David: Right.
Jeff: Now, the US has the lion’s share of that, but anybody who’s holding sovereign debt issued by other countries are sort of saying, “I think I’d rather have US Treasurys because of the risk thing.”
One of the things we’ve seen in gold and Treasurys over the last year and a half has been a move by institutional investors, retail investors, financial institutions on the buy side and the sell side, everybody has been trying to reduce their risk and their counterparty risk. And that’s the major impetus that’s pushed gold prices to record levels, and it’s the major impetus that’s causing investors and others to have record levels of Treasury holdings as well.
Now, could something go wrong, and somebody says that, “Yes, US Treasury debt is no longer as risk-free as we’ve always said it has been”? Yes, and that started in 2011 and we have a real risk in that the Republican candidate for President, in 2016 when he was running for President for the first time said, “Hey, I can run up the debt. And if people don’t like it, we’ll just declare bankruptcy and we’ll settle it for cents on the dollar.”
That’s not what the US Treasury does. That’s what scummy hotel operators do, and it’s a real scare. And if he gets in as President again, I think you will find around the world a lot of people starting to rethink their reliance on US Treasury debt as being one of the least risky assets that you can have your money in.
David: The headlines have represented central bank accumulation of gold, 2022 roughly a thousand tons, 2023 over a thousand tons, 2024 still on track for decent numbers. But what you’re suggesting is that there’s strong demand from elsewhere, it’s not just central banks. Where is that demand coming from, institutions, retail? It sounds like it’s broader based than just central banks.
Jeff: Yes, it is. Central banks, some of the numbers that are floating around on central bank gold demand, especially in 2022, are inaccurate. But central banks have been buying about 10 million ounces of gold on a net basis every year, really since about 2008. And over the last three years, it’s been about 10, 11, 12 million ounces that central banks have been buying. Investors have been buying 25, 26 million ounces over that same period of time, private non-central bank investors.
And you start saying, “Well, who are these investors?” And the answer is, just about everyone except retail US investors. Retail US investors have, on average, something like $4,000 in cash. So to say, let me diversify my portfolio and buy an ounce of gold means you’re going to put more than 50% of your wealth into an ounce of gold. So they’ve kind of lagged the rest of the world. But if you go around the world and you say, “Who’s buying gold,” it’s institutional investors, it’s high net-worth individuals, it’s family offices, it’s sovereign wealth funds, it’s a full range of private sector investors.
David: Are ETF volumes a proxy for investor demand?
Jeff: Absolutely not. Over the last three years, you’ve been seeing investors buy about 25 million ounces of gold per year. This year, in the first half of the year, it’s running at closer to 30 million ounces, so they’ve stepped up their game. Over that three and a half-year period, you’ve seen consistent sales of gold ETFs, and people have said, “Okay, well, you can get daily, weekly, monthly data on gold ETFs. Everything else is secret and you have to rely on somebody like CPM Group that can parse this out on a global basis.”
So you don’t see most investment demand, but ETFs, the data’s there every day. So you see it and you hear people say, “Well, I don’t know why gold prices are rising because I look at the ETF data and investors are consistently selling gold over the last three and a half years.”
And then you drill down and you start talking to some of those institutional and high net-worth individuals and they say, “I am still bullish on gold, but I’m reducing my counterparty risk. I want physical gold that I own. I don’t want shares in a Channel Island company that is managed and run by financial institutions. I want the gold.”
In the early period, 2021 into 2022, you saw smaller gold ETFs liquidate, people selling their gold holding there, but buying larger major gold ETFs like GLD. But then in 2023 and the first half of 2024, you saw them selling those larger ETFs run by larger financial institutions as well and simply saying, “I don’t want that counterparty risk. I want to own gold physically and directly.”
David: It sounds like distrust is consistent with de-globalization themes and recognition of market excess. You talked about 300% debt-to-GDP and $91 trillion in government debt, most of that not in the same category of risk as US Treasury bill, bond, or note. So that awareness of things being at a stretched point, that’s actually very encouraging to me because I generally consider the markets to be a little bit complacent. But if you’re saying that 30 million ounces of gold each year are being bought with a cognizance of counterparty risk and geopolitical risk, it sounds like there’s a lot of people paying attention.
Jeff: Yes. I think her name is Amanda Gorman, the young lady who read that wonderful speech at Biden’s inauguration. She had an editorial in the New York Times, I think in early 2023 in which she wrote, “If you are not afraid, you’re not paying attention.” And we quoted her in one of our reports. But yeah, there is an increased awareness around the world about the increased political—international politics and domestic politics—economic and fiscal risks that are there, and there’s an increased concern that it’s getting worse. And one of the reasons it’s getting worse is the introduction of AI systems, but also there are a variety of other factors. There’s a myriad of factors that are causing people to A) be concerned about the risks they’re facing today, and the probability that the risks will be greater tomorrow.
David: This is such a fascinating setup because if you’re not afraid, you’re not paying attention. That makes sense to me, but you’ve got financial markets hanging out near all-time highs in the US. You’ve got the VIX trading pretty close to single digits, low double digits, low teens, and the MOVE index that doesn’t seem to be a lot of concern, whether it’s corporate bonds, high yield, investment grade. In some measures we look like we’re in a perfect world, and yet what you’re suggesting is there is an undercurrent of concern, and maybe it is just the most sophisticated investors or the smartest people in the room saying, “No, that’s not the whole story. You can’t look at the S&P trading at 28 times earnings and keep a perfectly smiley face on.”
Jeff: Exactly. Yeah. It’s not just the smartest people in the room, I think it’s also a lot of other people, people who are struggling to meet their budgets. And I think stability that you see in the S&P or the Dow Jones or corporate bond indices have to do with changes in those mega financial markets and the types of institutions that represent the bulk of those markets and the econometric and computerized trading that they use to determine the value, all of which may just be a chimera that is based on bad econometric models and ignoring the fact that the financial markets at that top level have become increasingly divorced from the underlying economic environment.
David: Well, I’ve got one big question on gold, and then I want to talk about the annual silver book and some of the supply and demand dynamics in silver. We’re near all-time highs in gold. Does it have headroom from here?
Jeff: Yes, it does. Yeah, our view is that— We issued a buy recommendation on gold in November of 2000. And we said the world is changing in a way that probably, gold was like $260 the day we issued that recommendation, I should find out the exact date and price, but we said, “The world is changing and it’s going to be much more risky, and investors around the world are going to catch on, and they will buy more gold at higher prices for a longer period of time than ever before in history, and the gold price is going to blow right past $850.” And we kept that buy recommendation on until the fourth quarter of 2011. We issued a sell recommendation formally on the first business day of 2012, and we said, “We thought that gold prices could fall for three to five years.” They fell into 2013, they moved sideways from 2013 to 2020, and then they started rising and we said, “We think this is the second leg of an upward move.”
So we think that we are maybe halfway through the next leg up. And as a consequence, we think there are several hundred dollars more that you’ll see in terms of daily gold price changes. You have to segregate daily prices from annual averages, but we think there’s a lot of upside to gold.
David: So let’s talk a little bit about silver. There’s the basics of supply and demand in the silver market, and a huge amount of demand goes towards fabrication and electronics and things of that nature, but investors also play a role. What’s the threshold of investor demand that drives prices higher?
Jeff: Well, it’s interesting because right now, net investment buying of silver last year and in the first half of this year is extremely low. You’re seeing a lot of people buying silver and gross silver purchases are up, but you also have very large gross silver sales from disaffected and disenchanted investors that’s offsetting that. So the silver investment demand or the surplus, if you will, of newly refined silver relative to fabrication demand has fallen to very low levels last year and so far this year.
And that’s okay so far for the silver market because fabrication demand’s been rising in a strong way, and so the fabricators want that silver, and yeah, the price has moved up now, today it touched $32, but the price has moved up from $15 in 2019 to about $28 to $30 in recent weeks.
If those investors stop selling that have been selling, and the investors who have been buying continue to buy, you’ll see the silver price rise very sharply, at least on a short-term basis. The thresholds are different, and the real kicker is around a 100 million ounces net annual purchases.
David: So it’s about a 10% swing from total supply if you’re looking at what’s coming from recycling and from mine supply. A hundred million versus just about a billion ounces in terms of new product, is that about right?
Jeff: Yeah. And if you look at it, in 2019 investment demand was 38 million ounces and the price rose 3%, but two years later it was 113 million ounces and the price was rising 24%. So it’s that range between, say, 40 million or lower. That’s typically not a major demand for silver on the part of investors. But if it gets over 40, it gets up to 50 or 60, you start seeing much more upward pressure. And the fact that you do have this stronger fabrication demand adds to that. So it takes less investment demand right now to push the price higher because it’s all a matter of investors who own silver, and they own a lot of silver, continuing to hold that silver and the marginal sales from that stash of investor sale of silver drying up.
If you look at the price of silver back in 1979, 1980, the price started rising. And the same is true in 2003, 2006. The price started rising when investors were still net sellers in both cases, but they were selling less silver than they had been because the investors had been, in the mid to late ’70s, they had been consistent net sellers, and that same was true from 1990 to 2005. And what happened in 1979, and then again in 2004, 2005, was those investors who had been selling, disenchanted investors in both cases, said, “Wait a second. If I wait and sell tomorrow, I think I might get a higher price than I get today.”
David: Yeah.
Jeff: And so it was a reduction of the net sales in the late ’70s and in the early ’00s that started the silver price rising. Once the silver price started rising, the deceleration of gross sales picked up speed. People stopped selling, “I’m going to wait until tomorrow, the price is rising now. This is great.” And you had new fresh buyers coming in, demanding more metal. So the gross purchases of silver are very important, but it’s really that net, when you see fresh investors buying and stale investors pulling back from selling at whatever the market price is, “I think I’ll wait until tomorrow and see where it goes. That’s when you see the silver price rise really strongly.
David: Silver’s primarily a by-product metal. So I guess from that standpoint, you could argue that supply and elasticity is a greater factor in silver than gold.
One of the things I found very interesting from the latest silver book, your silver book, again, I highly recommend folks who are avid detail-oriented folks to look at your research, but to see the solar, the photovoltaic demand up 100% in the last three, four years. It was 100 million ounces in 2020. Now, it’s 200 million ounces a year, and that’s up from 2010 levels of say 35 maybe. Such a big move on the industrial side, specifically for photovoltaics. And that’s where I think just a little bit of a nudge from the investment community and you discover the price dynamics as people realize just how inelastic the supply truly is.
Jeff: Yeah, first off, you have the newly refined material. And yes, 70% of newly refined mine production comes from copper, gold, lead, and zinc mines, 30% is silver oriented. So you see that. You also see scrap because traditionally most of the scrap has come from jewelry and silverware, and that’s very price sensitive. And when you see the price rising, scrap, people who own old jewelry or scrap silverware will be less likely to sell it if the price is rising. They’re going to wait to sell that stuff. And then you have the above-ground refined inventories, which are heavily owned by investors on a worldwide basis, and there’s a tremendous amount of metal there.
And we say this thing, it sounds like a tautologous statement, but it’s actually central to precious metals price projections: One of the major factors determining future prices is the future price expectation of inventory holders. If inventory holders say, “Silver has been falling for five years, I’m just giving it up. I was told it would be $100 by now or $700 by now, just get rid of this stuff and I’m going to put it into some speculative stock.”
If investors expect the silver price to fall, they will sell their silver. If investors think the price is going to rise, they will not sell their silver, and that will contribute to the upward pressure on prices. And same is true as in gold, platinum, and palladium.
David: Looking at gold and silver and the whole complex of precious metals, I’m curious, if gold holds these levels or, as you say, maybe it tacks on a few hundred dollars between now and the end of the year, 2,650, 2,700, something like that, is silver priced right at $32?
Jeff: No, silver prices rise in that kind of environment.
David: Are we talking like a spike to 35, 40? I mean, what becomes irrational relative to gold? And I think a part of me is going to the gold-silver ratio, never a constant, high at 120, low at 15. At 80:1, does that suggest a significantly higher silver price or what are your thoughts?
Jeff: Gold-silver ratio is the key variable to look at. I think it’s the silver price itself, and silver price is relative to supply and demand. But to address your question, again, you have to differentiate between a daily price and an average, a quarterly or annual average. Trying to pick the peaks and troughs is very dangerous. It’s like catching a falling knife. If you look at 1980, silver peaked at just below $50, the average price that year was $21. If you look at 2011, the price peaked at just below $50 on a daily basis, and the annual average was about 34, $35.
So we project 10 years out on a annual basis, and we have record silver prices on a annual basis over the next several years. And again, that record, you compare to that 2011 peak around 34, $35 an ounce. So we’re looking for record prices on an annual average basis. And then we are also looking for the intraday price to spike up at least to $50 and maybe over $50 at this point, depending on what happens politically and economically in the world. So we’re looking for a replay of those previous spikes.
David: By no means am I asking you to disclose something that you’re not allowed to, but my guess is that in the 1980s, you had some exposure to or understood what was going on with Hunt brothers and the accumulation of silver and those price dynamics. What I’m getting at is we had a 15:1 ratio then.
During COVID we got to 125, something I don’t think had ever been recorded before. And I don’t know what normal is anymore. I don’t know on that bell curve of probabilities if we ever see either of those numbers again, what is a normal trading range in your opinion, and what should we expect in terms of that ratio going forward? 40 to 60? How would you define the one standard deviation from the mean for the ratio?
Jeff: Okay, well, let me first say, yeah, I knew Nelson Bunker Hunt. In fact, at one point, he said I was the last person in New York City he talked to, which I thought was a very nice thing to say. And years later, in the late ’90s, someone took one of our investment structures and put it on their letterhead and sent it to Nelson and said, are you interested in this? And he called them and said, okay, first off, I’m not allowed to own silver under the terms of my 1980 agreement. But the second thing is, say hello to Jeff for me because you obviously stole this from CPM Group.
The normative range is like 40 to 80, the gold-silver ratio, but we only show the gold-silver ratio because people pay attention to it. There’s no physical or metallurgical or electronic or chemical or geologic or economic reason why the ratio should be anything gold to silver. It’s just there.
Now, 16:1 was interesting because Nelson Bunker Hunt said, “I think the ratio should be 16:1.” And he bought silver and sold gold predicated on that belief, and the ratio hit 16:1 the day he went bankrupt. That was the key. He got there, but the liquidation-only orders occurred not because he didn’t have the money, but because of some logistical things that they had in their organization that didn’t allow for them to meet their margin requirements on that date.
But he drove the price to 16:1, and it got there the day he went bust, unfortunately. 120:1, 125:1, that represented very weak fabrication demand. Most of the silver goes into it, but it also represented a tremendous amount of concerns and fears and uncertainties on the part of investors around the world who were loading up on gold.
So that’s there. And going forward, what we’ve seen since 2020, and people, I don’t know who, some people have been predicting a much lower gold-silver ratio, a much stronger silver price relative to gold. And they keep saying, “Well, Silver’s got to play catch up with gold.” And we keep saying, “Not necessarily.” What we’ve seen really since 2020, 2021, is that investors around the world have paid much more attention to owning gold, given the economic and political circumstances they find themselves in rather than silver.
The preference is clearly gold, not silver, and that may continue. Silver will benefit alongside of gold, but that preference for gold over silver may continue for the next several years. So that the gold-silver ratio may surprise people who think that it ought to be 40:1 to 80:1, or 50:1, or the average is 60:1 and it’s touched that five times in the last 50 years. We think that the gold-silver ratio may stay high and even move higher because we think that investors have a greater proclivity toward gold right now and are likely to continue to prefer gold to silver for the next several years.
David: Having said that, you’ve suggested in the commentary that the second half of the year is where you would expect to see a little bit more performance from the metals and perhaps silver as well. Do you still hold to that or have we already gotten to some of your price projections a little sooner than anticipated?
Jeff: Gold and silver have risen to levels that we thought they’d reach in the final four months of 2024. And we said, so were we wrong about the timing or were we wrong about how high they can go during this economic and political cycle? And our conclusion clearly was that we were wrong about how high they could go, that we’ve seen the prices rise more strongly in the first half of this year than we expected, and reach— We were talking about $2,400 gold by the end of the year and we were talking about $32 silver by the end of the year. Our views now are that gold and silver will move to higher prices in the final four months of this year because this is not the peak of the economic and political problems that are driving investors into gold.
David: Well, that’s the point, isn’t it? I think it’s fair to say that the price of metals are a good proxy for sentiment amongst investors, and you’re so right. The outperformance of gold suggests that there’s a deep level of concern and there’s really no risk appetite, silver perhaps being a different risk profile than gold. So there’s still anticipation of a bit more, if we call it stormy days ahead.
Jeff: Yeah. In fact, we have one client that likes to have themes. We produce reports for them on a bimonthly basis, and they always want to have themes. And the theme this year is rising storms. Last year, the theme was in the eye of the storm. The year before that, it was the gathering storm. So we’ve been saying for several years that we thought that there were these political and economic and financial storms that were on the horizon and they were approaching, and that was one of the things that was fueling gold and silver investment demand, and thus higher prices. But now, this year, we’re saying, “No, the storms are right on top of us and they’re probably going to stay on top of us in 2024 and 2025, and maybe into 2026, and maybe even longer than that.”
So it sounds alarmist, and I would hesitate to sound alarmist except for the fact that everybody that we talk to around the world is pretty alarmed. And they’re very much concerned about what’s happening, domestic politics in the US, domestic politics in their own country, international politics, global economics, trade wars, hot wars. There’s just so much going on, people are saying, “I think I should have gold and silver.”
David: Okay. So the platinum group metals are considered precious metals, but like silver, a sister white metal, they do have these industrial uses, and so a different economic profile, maybe even economic vulnerability. So while we talk about demand for the precious metals as a hedge, talk to us a little bit about platinum. It’s not so much a hedge, but I’m curious to know your views on the supply and demand side. 2024, 2025, and what you see playing out within platinum and palladium, those dynamics.
Jeff: Our advice to our longer-term investors has been that we think that the platinum price could rise somewhat over the next year or two, but from a longer-term perspective, platinum and palladium are primarily used in auto catalysts. They’re losing market share to electric vehicles. Electric vehicles on a global basis are like, I guess 12 or 13% of light duty vehicles. That is a 12 to 13% loss in the major use of platinum, palladium, and rhodium, and it’s going to continue. In addition to that, you have thrifting and you have other factors.
So there’s a lot of negatives weighing on platinum and palladium, and we’ve told our investors, these are not metals that we would be buying at this level because we just don’t know that the prices will rise back to 1,400. Platinum today is at $1,018. We could see it rising to $1,100 in the next month. We could see it rising to $1,200 over the next five years, but we don’t see it going back to 1,400 or 1,600 or 2,000, where it was prior to 2014.
So we think that the long-term investment attraction of platinum and palladium are past, and we’re telling people we don’t necessarily see that, partly because of the fabrication demand. The bullish factor in platinum and palladium is the fact that you’re seeing lower production in South Africa and in some other countries, and the supply of newly refined platinum, primarily from mining, but also from old catalytic converters being recycled after the cars come off the road, you’re seeing lower supply. And this year, mine production might fall 5%, with the bulk of that— Well, Russia’s falling, too. Russia’s down, South Africa’s down. Those are the two big producers. I think Russia’s actually up, but other countries are showing some weakness. So it’s really South African production. And South African production has the capacity to fall further over the next several years, and if it does, that’s bullish for the price.
David: So it’s more of a supply story at this point than a demand story.
Jeff: Yeah.
David: Okay. So from a big picture perspective, an investor looks at precious metals, wants an allocation, wants to moderate risk, lower risk and volatility, and total portfolios. You’ve mentioned earlier concern about counterparty and other forms of risk. How much gold and silver should an investor own? And if we’re talking about sort of reducing risk and improving performance, where’s the sweet spot? Is it 5%, 10%? Circumstances that would ever drive it above that number in terms of a net worth figure?
Jeff: Yeah, the sweet spot depends on who you are. I mean, we can do optimal allocation models, and the optimum allocation model says that from 1968 through 2023, the best performing diversified portfolio had 25 to 30% of its assets in gold or silver. But that’s historical, and it includes that period 1968 through 1980 when you had— Part of the increase had to do with 14% inflation, and part of it had to do with massive deregulation of industries and the oil price and the copper price. And part of it had to do with one-time adjustments following 70 years of fixed prices under a gold standard and US Treasury silver purchase acts that Congress had passed.
So it depends on where you are in the economic cycle, whether it should be 5 or 10%, or whether it should be 30%. In addition to that, it depends on who you are and how much wealth you have and where you live and what your personal situation is. We’ve had billionaires who were clients who had less than 1% of their wealth in gold, but it was hundreds of millions of dollars, or maybe it was less than 10% of their wealth. But they had a substantial amount of gold and silver, but it was a very small percentage. There are other people who don’t have that much money, but they have 5 or 10%, and maybe they have 20% right now.
It also depends on your assessment of the risks you’re facing, and some of those are the risks that we’ve been talking about, political and economic and financial industry stability. But part of them are personal risks. We just wrote a piece for one of our clients, and one of the conclusions we said for investors is you’re on your own. You need to do the work. You need to study. You need to listen to rational commentary and make an assessment, an informed rational assessment of what risks you’re facing. You need to look at your personal wealth, your personal health, how old your children are, where they’re living. Are they working in a oil rig or are they working in a office someplace? Are you working in an oil rig? Are you working in a office someplace? You have to look at your personal finances and your personal risks, as well as those exogenous risks that you’re facing as part of society, as part of the United States, as part of the world, and make an informed decision as to what portion.
Unless you have a world war going on or a war in your country and you need to leave, you shouldn’t probably have more than 30% of your wealth in gold and silver. But there are times, like now, when 20 to 30% makes sense depending on your own personal circumstances.
David: I sit on a variety of boards, specifically nonprofits and college universities with foundation money that has to be invested in perpetuity, and it’s interesting the number of Wall Street companies that are engaged in this process, engaged in the conversation of allocating assets with a long time frame in mind. It seems that there’s a bias on Wall Street, a bias towards paper assets and a bias against precious metals.
I’ve never been able to move the needle past a few measly percentage points. The 5% number, I think someone would feel like there would’ve been a coup on the board. 10%? I mean, what does the world come to that we need 10% in gold? And it’s always private equity, private credit, hedge funds. Everything that is the most popular flavor of the month is there. Am I right in perceiving something of a bias towards paper assets and against precious metals on Wall Street?
Jeff: There is a bias, and it’s based on several factors, and I guess the best way to talk about the factors is maybe with anecdotes.
We had one pension fund that had a gold and precious metals mining and bullion from portfolio manager. He was our client, and they had put a substantial portion of their wealth into precious metals, and they were doing very well. But new management came in, and they just basically decided, “Liquidate that stuff.”
We had another client, which was very interesting. It was a large corporation’s pension fund, and we worked with them for months on “This is the quantitative analysis that says, yes, you should own some gold and silver in your pension fund.” Toward the end of that process, a gold promotional organization, a global gold promotional organization caught wind that this pension fund was considering a gold allocation, and they weaseled their way into a meeting with the pension funds board. We were talking about the quantitative aspects and how you actually invest in gold, and their economist got up and gave a talk about the eternal allure of gold to investors. At the end of the meeting, the chair of the board said, “No, we’re not going into gold. Yeah, we don’t give a darn about this.”
But there’s another thing, which is a lot of professional money managers come to precious metals and commodities from stocks and bonds. Stock market, you have the SEC and other regulators saying, “If you’re going to be publicly listing these stocks, this is your disclosure requirement.” There’s all kinds of information that’s scrutinized by the SEC, and you’ve got to take tests. You’ve got to prove that you’re a legitimate, honest, sober person telling the truth, and there are very severe consequences if you don’t tell the truth.
In the bond market, it’s all math. It’s math. As one of the partners at Goldman Sachs famously said to me shortly before I left, “If my traders have to think before they make a trade, they shouldn’t make that trade.”
So you have these guys, and if you don’t do a good job, they say, “I’m going to move you into the commodities department.” In the commodities department, you’ve got people talking about the eternal allure of gold, and you say, “I’m sorry, but I grew up in the bond market. Give me some quantitative analysis that this makes sense.” The gold market doesn’t. In addition to that, you have the fact that the bond market, the stock market, SEC regulated, very tight. You got to take really tough tests to be on the sell side.
In the precious metals markets, especially in, well, the futures market has some testing, but in the OTC market where most people buy and sell their precious metals, there’s no regulations. So if you get banned by the SEC, you may never trade stocks and bonds again as long as you live. And you get banned by the CFTC, you’re out of the futures market.
You can sell insurance or you can sell precious metals because the precious metals physical market doesn’t care if you’ve been convicted. It’s just really weird, and there are other anecdotes that I can tell you.
Then there’s one other thing. If I am a broker and I sell my client or convince my client to buy a stock or bond or an ETF, the turn of that investment is probably around 12 or 13 months. He’ll sell it, and he’ll buy something else, and I’ll get another commission.
If I sell him gold bullion, the turn on that asset is his children may come to me after he dies and say, “Sell the gold so we can pay the estate taxes and we’ll keep the stocks and bonds.” So from a sell side perspective, it’s like, “Okay, give me the same commission for selling gold bullion as you do for stocks, but I’m not going to see another commission on that money ever.”
So there’s a bias against convincing people to buy gold. So there are a lot of reasons why there is an institutional bias against precious metals on the part of the financial market.
David: I love you bringing up the quantitative aspect. Back in the late ’60s, early ’70s, we launched our business in 1972 and provided precious metals on a wholesale basis to Wall Street firms. There’s a tax loophole that allowed us to be in the bullion business and have sort of a first-mover advantage.
My dad ran the numbers then, and the optimal allocation in a growth-oriented portfolio, 75% stocks, 25% gold, with an annual rebalance, outperformed 100% equity portfolio and outperformed 100% gold portfolio. So there is a diversifier. It was there as something that reduced risk, and with that annual rebalance allowed for buying equities when they were cheap. Selling gold was expensive. It was nice in terms of its sort of countercyclical move.
I’m curious, as a value investor, what in the metals complex is most intriguing, most compelling to you if you’re putting money to work today?
Jeff: It’s got to be gold. As I said, I wouldn’t go into platinum and palladium. Copper is interesting, but it’s probably been overbought or oversold. Silver’s interesting, too, but I think that gold’s the most compelling asset for me right now.
David: That may speak to your level of concern, the probability of greater geopolitical and political instability. At least from our conversation, it sounds that way. What would you suggest is the new range for the price of gold?
Jeff: For the price of gold? Over what period of time, the next 10 years?
David: Well, let’s look at it from two vantage points, the two-to-three year timeframe, and then something maybe stretching to 8-to-10.
Jeff: We have a monthly report that we project out two years on a quarterly basis, and our projection there is that the range of prices for gold might be between 2,200 and $3,000 over the next two years. And over the next 10 years, our projection is 1800 to 3,200.
David: So in either case, 3,000. Again, you’re adjusting these on a quarterly basis. You might have sort of an intraday blow-off at higher numbers, but I appreciate you guys keeping a balance between whether it’s an annual average or a quarterly average, 2200 to 3,000, or on a longer-term basis, 1800 to 3,200. Does that assume a relatively stable inflation rate where we don’t have to worry about sort of repricing of all assets, gallon of milk being $8 or a dozen eggs costing a dozen bucks? I mean, I’m assuming you’re assuming sort of a constant dollar.
Jeff: We’re assuming that US inflation remained relatively under control. That over the next 10 years, you may have bouts of inflation.
But let’s be realistic. In 2021, coming out of the lockdown, inflation got up to 9% like for one month, and beyond that, it was below 9%. You compare that to the inflation rates of the 1970s when it got up to 14% and stayed in double-digit levels for several months at a time, and you compare that to hyperinflation, which is like what, 30% monthly, you don’t see hyperinflation in the US dollar on prices, and you probably don’t see persistently high inflation over 10%.
In certain economic scenarios, you could see inflation spike up for a time. But we think that because of the structural developments in the global and US economy and financial markets, that you don’t necessarily expect inflation to be the major problem. We have a list of problems that we look at that could cause investors to buy more gold. Inflation is probably the least important one.
David: Yeah. As you were talking about that sort of 5 to 10% allocation or even a 25 to 30% allocation, what was clear is you’re dealing with a varied global demand dynamic depending on who you are, where you are. If the US dollar and inflation here is not the concern, it doesn’t mean that you have your assets denominated in dollars or you live here. Who are you? Where are you? What are your personal risks? All of those factors go into the equation of what is an optimal number for you.
I just want, as we wrap up, to thank you for the input that you’ve been into our thinking for many decades. We really don’t do without the yearbooks, so the gold and silver, the platinum and palladium. When we want to look sort of behind the curtain, what’s going on in industry from a recycling standpoint, from a current mine standpoint, looking at cash costs, all-in sustaining costs, we look at individual companies on occasion from the producer side.
But you do a great job of compiling this information and allowing the numbers to speak. There is a lot of hyperbole. Well, we find hyperbole in the news as much as we do anywhere else these days, but there’s a lot of hyperbole in the gold space, and you do a great job of anchoring it to terra firma, so appreciate that.
Jeff: I appreciate that you appreciate us. It’s good to know that somebody, somebody cares about it.
David: We do, and we’re back to that conversation about an internship, journalism, international economics, looking at politics and public policy, political economy. I appreciate your interest in those things coming out of college and your early days with McGraw Hill, J. Aron, Goldman Sachs, and now the CPM Group.
Well, we look forward to a future conversation. Thanks so much for taking the time to share your insights with our listeners.
Jeff: It’s my pleasure. It was a very good conversation. I appreciate that.
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Kevin: You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany and our guest today, Jeff Christian.
If you’d like to look up CPM Group’s information, go to cpmgroup.com, and you’ll be able to find out more. Our number here at McAlvany is (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 adviser to assess your suitability for risk and investment.
Join us again next week for a new edition of the McAlvany Weekly Commentary.
