Podcast: Play in new window
This week’s McAlvany Weekly Commentary covers a sharp temporary drop in gold as tightening liquidity pressures force selling across the system. David also looks at the energy shock now hitting Asia and Europe, with prices rising 35% to 140% in key areas. He explains why this dramatic counter-trend move in the metals may actually reinforce the longer-term bullish case. The episode also breaks down growing stress in private equity and private credit as conditions continue to tighten.
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Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany. David, one of my favorite poets is Samuel Taylor Coleridge, I think he’s the one who came up with the phrase, “Suspend disbelief.” Now, last week you were away, and I’m hoping that you were able to suspend some disbelief.
David: Well, you have to at Disney World.
Kevin: Yeah.
David: It is the happiest place on earth. It may be the most bizarre place on earth as well.
Kevin: Yeah, yeah. Well, I would think the Middle East is sort of bizarre right now. So, you had an awful lot of chaos going on worldwide at the same time that you were— What’s your favorite ride at Disney World?
David: Definitely Guardians of the Galaxy, and Trump did not make an appearance. They didn’t play his theme songs. In fact, we didn’t even get Tears for Fears, not even one time.
Kevin: Really?
David: No, no. We were gypped.
Kevin: Well, while you were gone, gold and silver tumbled. Okay? Interest rates on, well, not so much the sovereign debt, but interest rates on other debt have been rising fairly quickly. And so, yeah, welcome back, David.
David: Yeah. Well, I mean, interest rates were on the rise with sovereign debt, and it was notable, but not to a point which is critical. So, US 10-year Treasury yields, 4.37%. This week, UK 10-year gilts, 4.89. And German 10-year, up to 2.99. There has been a directional shift higher, but little in the sovereign debt markets that signals a massive shift in inflation expectations.
Sovereign debt is the core of the core of the fixed income markets. There is developing drama there, but far more if you look at the periphery of credit quality. So leveraged loans, private credit, CLOs, they are now a daily feature on Bloomberg. And as I look at the Financial Times, New York Times, Wall Street Journal, you’re going to find a different company featured almost daily. Credit sponsors, limiting redemptions, and it looks more and more like contagion in the private markets has set in.
Kevin: Well, you had talked about Blue Owl, and that was— You said every once in a while we would have something three or four weeks ago. Now what you’re saying is, every day that’s showing up. So in a way, it’s really hard to find a safe haven, right?
David: Yep, Blue Owl was the first, there’s now at least 10 funds that have followed suit, limiting or suspending redemptions as requests have exceeded the quarterly caps. And so, that’ll make for a very interesting second quarter as people get in line for liquidity. So, safe havens, you’re right, they’re hard to find at the moment. Sovereign paper is a classic safe haven. It has sold off, and to see interest rates on the rise would suggest that there’s more concern about inflation than there is a drive into sovereign paper as a safe haven.
Kevin: And that’s probably energy related, right?
David: Yeah. I think they’re reconsidering the impact— Investors are reconsidering the impact of record debt levels and rising rates. Obviously, an energy shock is gradually being priced in as a fledgling inflationary concern.
Kevin: Well, correct me if I’m wrong too, we passed 39 trillion this week, didn’t we?
David: Yeah.
Kevin: While you were in Disney World?
David: Wednesday. Yeah, it’s a small world and a large number. 39 trillion, that threshold. Bessent has his work cut out for him at the Treasury. And of course, precious metals were not so precious last week. Significant technical pressure and a cascade of stop-loss orders, all the way down to the 200-day moving average. At least in the European markets prior to the Monday open, we saw that steep decline. And then a quick rebound of several hundred dollars off the lows.
Kevin: It was like a $400 drop overnight and then the bounce, right?
David: Correct, and same with silver. $10 higher for silver off the overnight lows. We give the benefit of the doubt to the secular trend in metals, mindful of a necessary, even if seemingly brutal, short term price correction. Lower prices earlier in the year are a great setup for a third, fourth quarter reassertion of the primary trend.
Kevin: Well, and I think it’s good to remember, we’ve talked often in the Commentary, Dave, that countertrends, whether you’re in a rising long-term market and you see the downturn, or if it’s vice versa, the countertrend is usually the violent one. And what I was sharing with you last night when we were together was just, it’s encouraging to see the violence of this drop because it just shows how strong the secular bull is in the long run.
David: Yeah. I think the countertrend moves, they’re always particularly dramatic. In this case, the primary trend is up and the countertrend decline has found support at the major moving averages. And 4,100 is a very relevant number for gold. Retesting that level in the US markets would be healthy. Yes, temporarily uncomfortable. The line of purchasers was getting longer and longer, in the 5,000 to $5,400 range, and now the line is non-existent.
Kevin: Well, and the enthusiasm for gold, you watch that, and the enthusiasm for gold when that was happening was 100%. Now it’s dropped to what, three?
David: Yeah, the bullish percentage, if you’re looking at the bullish percentage measured for gold shares in particular, was pegged at 100, where you had wild enthusiasm. And Friday of last week, it hit 3.6%. Only lower, I think you have to go back to December 2015 for a measure which got to zero.
Kevin: Wow.
David: Got to zero.
Kevin: And that would have been a good time to buy. Yeah.
David: Well, when you get sentiment that knocked around, it is an indication of putting in lows. And so, it doesn’t mean we’re at the lows, but it means we’re very near them if we’re not at the lows already. So I mean, time will tell, but this is typical herding behavior, and I would act in the opposite spirit to the market. You buy lower and when you’re at higher levels, you trim back your positions, versus the recent instincts to buy higher and then sell lower.
Although in fairness, I think buyers of physical metals tend to love the lower prices, you get to add ounces at a better cost basis. It’s really where you see the pressure most is in leveraged ETFs, in the futures market, with options traders. That’s where you see more of the liquidation mode.
Kevin: Well, and we saw that, Dave. For the person who owned gold in 2008 when we had the stock market crash and the global financial crisis, the people who had gold, they needed liquidity. So, gold is one of the most liquid assets in the world. That’s what happens.
David: Yeah, and always worth recalling that gold as a safe haven, if you’re in the context of deleveraging, it has in the past looked and behaved like a risk asset for a period of time. And the current selloff suggests to me that the pressure in private credit and in a variety of leveraged trades is more intense than the business news media has suggested. So you go back to 2008, that is a good example of gold selling off as the mortgage backed securities and asset backed securities market was coming unglued, only to reassert its primary trend within 30 to 60 days.
Kevin: Yeah, it was very quick.
David: Yeah, so finished with a positive number for the year in 2008. I think gold was up five or six percent by the year end, even though it had a 30% drawdown in that correction. And then went on, it was followed by more than a doubling in price off of those corrective lows. So, the late 2008 correction was short, it was sharp as a countertrend correction typically is. And when this correction is over, we’ll have set the stage for $6,000 gold, $8,000 gold, ultimately over $10,000 gold.
Kevin: Well, and you had mentioned the need for liquidity. We’re seeing that in the credit markets, but also Morgan this morning brought up the fact that probably Middle Eastern selling with the Straight of Hormuz being bungled up right now, they’re needing to raise liquidity as well, and a lot of their liquidity is in gold.
David: Yeah, and a part of that is just, how do we pay the bills? You’ve got Qatar, Kuwait, Iraq, all looking at a decline in GDP of between 11 and 14%, which is on par with what it was at its worst during the pandemic. And so, you get a couple of countries that are going to take a major hit and will have to fund operations, governmental operations, with something. So having gold reserves, it’s a classic rainy day fund. And so yes, they are in some essence, in some sense, raiding the piggy bank.
Kevin: Well, but here in America, a lot of times there’s a preference for dollars and that preference is based on the need for liquidity, like what you’re talking about.
David: Yeah, and I think that that preference for dollars over gold, it is a liquidity preference as solvency comes into focus as a concern. Counterparty risk will drive safe haven buying back into gold, and it’ll behave less like a risk asset and more like a ballast or a reserve asset.
Kevin: So you’re basically saying stay patient, because this is temporary?
David: Yeah, I would be patient. I’d stay the course. The primary trend is very clear. I would add on weakness, this is temporary. It’s also worth noting that the Bank of International Settlements, the central bank to the central bankers, had commentary out in the last couple of days on the role of leveraged ETFs in exaggerating the price volatility of the precious metals.
Kevin: Right.
David: And I think that’s fair on both sides. I mean, how do you get a 50% move in the price of silver in less than 30 days, and then a remarkable decline on the other side of it?
Kevin: Margin calls.
David: Yeah. Forced liquidations or, if it’s just looking at losses accumulating at twice the usual pace, you exit those positions and add even further downside pressure.
Kevin: And wasn’t it leverage that also pushed the price up so quickly? I mean, at that end when you started to see the spike?
David: Exactly. I think it’s exaggerated on the upside by that same leverage. And now we get to see the dark side of a leveraged move. And it’s worth noting where we’re at in the precious metal secular cycle. Thus far, we’ve seen some opportunism in purchases. You see price appreciation, you see outperformance of gold and silver versus the S&P or the NASDAQ, and you want some of that. So you’re lining up for gains, and typically a bull market reaches its crescendo when you have fear and panic buying. And this is anything but fear and panic buying. The late 25 and early 26 scenario was fear of missing out. Wait, it’s a winning trade and I’d like some of that.
Piling on, and piling on with leverage, the fact that there was a lot of activity in the leveraged ETFs, futures market and options markets, again, suggests that it’s a different quality of buyer. And the motivation, the reason, is really not macro in nature. I think you certainly have some macro hedge funds that look at gold as a core holding and look at mining shares as an extension of that, a leveraged play on a longer term bet on the metal itself.
But your smaller retail speculator is looking and says, “Well, if silver’s up 10%, I’d rather be up 20. If silver’s up 40, I’d rather be up 80.” And so they’re playing for gains. It’s a different motivation than asset preservation. It’s a different motivation than having something that at the end of the day has simply been money for 5,000 years and is a better expression of a currency allocation not managed by the current PhD standard.
Kevin: Right, right. You don’t want to play precious metals necessarily for the gain, even though it brings the gain. But with what you’re talking about in the credit markets right now, there is an increased need for liquidity. And so the pressure, why don’t we talk about pressure on what everyone has, which is a mortgage. And we’re not seeing the lower rates that we were hoping for.
David: Well, and when we begin to see liquidity drained from the system, it is first at the periphery. So we mentioned leveraged loans and collateralized loan obligations, private credit being under acute pressure last week, but you also saw increased pressure last week in the mortgage market, mortgage backed securities, the prices went higher, agency paper, the cost went higher. And we also saw acute pressure in corporate credit as well, both investment grade and high yield paper. You’re beginning to see some real attention paid to credit quality and of course the spreads begin to rise above the Treasury rate.
Kevin: Well, and Morgan said what we’re seeing are classic signs of a liquidity squeeze right now, and corporate credit, that’s going to fall into that as well. Companies are going to be affected.
David: And as corporate credit shows stress, as we’ve long argued, corporate credit pressure increases pressure on the equity markets. So first in most— If you want to see where a real nasty decline in equities comes from, it’s when the cost of capital is on the increase for your corporate borrower and that—
Kevin: So that’s affecting the equities price right now as well.
David: Yeah, I think that’s probably on a lag. So yes, we saw some volatility last week, but I think what happens in credit ultimately plays out in equity, and we are seeing some shifts in the credit market. So whatever we saw last week in the equity market pales in comparison with what we’re likely to see going forward should that pressure in credit remain.
Kevin: Well, and that’s leveraged as well. I mean, equities are leveraged just like the credit has been.
David: Yeah. And so to the degree that interest rates migrate higher, your leveraged traders will be forced into a very awkward position. And again, the biggest leverage out there is in the hedge fund community, whether it’s risk parity or basis trades or carry trades, they were getting stomped on last week. And so, again, these are certainly, they play both equity and debt, but they were catching it on both sides last week, risk parity in particular. So, interesting, we see credit default swaps moving up meaningfully on investor concerns of solvency. That was a shift last week, and also, particularly in the emerging markets, you saw credit default swaps on the increase.
Kevin: Which is basically insurance on volatility, right?
David: It’s insurance on default. And so as the cost of insurance goes up, you’ve got more people clamoring for coverage. It’d be like, you’ve got a minimal policy, fire policy on your house, but then all of a sudden you’ve got a forest fire and it’s raging and you’re thinking to yourself, maybe I should top that off. Well, try to get it.
Kevin: To do that. while it’s going. Yeah.
David: And it may be on offer, but it’s going to be at a much higher price.
Kevin: That’s a good analogy.
David: Yeah. It’s also in the emerging markets that you see evidence of an unwind in carry trade speculation. So when CDS rates are going higher in the emerging markets, it’s a pretty good indication that the carry trade, very leveraged speculation, is coming unwound. So Friday, credit default swap pricing was higher by 52 basis points in the emerging markets, a major move, and it went to the highest set in April of last year amid the tariff turmoil.
Kevin: Well, I’m wondering, too, with the emerging markets, the emerging markets might— Do you think there’s an effect of the higher energy prices because we’re not as affected as, say, Asia would be, right?
David: Yeah. And I think that’s an important point, is much higher vulnerability to a rise in energy costs in Asia and in Europe. I mean, there’s a number of popular emerging market investor destinations where carry trades have attracted a lot of capital, but if you just focus on Europe and Asia, if we’re paying $3 per million British thermal units.
Kevin: BTUs.
David: BTUs.
Kevin: Okay.
David: It’s about a 7% higher cost than before the conflict started.
Kevin: So that’s not that noticeable here.
David: No, but Europe is higher by 140%.
Kevin: Oh my.
David: So from 11 to now $27 per million BTUs. And in Asia, the JKM market has moved from 14 to— I mean, it’s quite volatile, but a range of 19 to 24. So it’s up anywhere from 35 to 70%.
Kevin: So is there a recession in the wind with the countries that are paying so much more right now?
David: Yeah. I mean, think about your manufacturing base in Europe and in Asia. Energy costs are a significant input, and it stands to reason that a 35 to 70% increase is going to impact your profitability. A 140% increase in Europe is definitely going to impact your profitability.
Kevin: And the price, and the price you pay for those goods.
David: Yeah. So recession risk is much higher in Asia and in Europe. And these are places that are far more dependent on energy imports. So continuation of the conflict in Iran will see much more dramatic impact there. And if global recession dynamics set in, you’ll see an impact first in Europe and then, on a lag, I think into US equities.
Although we don’t face the same risks in terms of import vulnerability, there still is an impact if you’re thinking about US equities. The S&P 500, that comes to mind, two fifths of profits come from overseas. So if demand is squeezed overseas because of recessionary tendencies or trends overseas, then it will show up. Won’t show up in something like the Russell 2000, small caps, which are really focused on a domestic market. But if you’ve got multinationals in the mix, that’s where your two fifths of profits are coming from overseas and you’ve got to be much more mindful of recessionary trends outside the United States.
Kevin: Well, and you had brought up, we don’t really have to worry about a supply problem. That’s very different than the 1970s, when we had the oil crisis in the 1970s. At this point, we export oil, right? We’re not importing oil nearly as much as exporting.
David: Yeah. And last year, we benefited from that to the tune of, I think, 64, $65 billion, if you’re looking at sort of our energy trade balance. We’re a net energy exporter. We don’t have supply problems. We may end up with a consumer price problem. Swallowing higher prices at the pump is economically challenging for a lot of households, and it’s very politically consequential.
And so keeping in mind the midterms, this is something that could be a defining factor for the midterms. But in this respect, things could not be more different than the 1970s. We had total dependency on Mideast oil. It’s a non-issue in the US today. It’s very much an issue in Taiwan, very much an issue in Japan, very much an issue in South Korea.
Kevin: When we’re talking about Asia and Europe right now, I mean, this is probably an area that we haven’t really paid enough attention to.
David: Conflict in the Middle East tightens global energy supplies. It pushes oil and gas prices higher. Increases inflation as a net effect. I’ll repeat, it’s Asia and it’s Europe that are the most vulnerable to recession. And frankly, from a strategic standpoint, there’s glaring vulnerabilities in places like Taiwan, down to 11 days of oil reserves.
Kevin: Wow.
David: That is very interesting because you recall that what we’ve done, what the US has done, the Trump administration has done to blockade Cuba from fuel supplies. We had a complete power outage just a few days ago in Cuba, with no fuel available, zero. China can easily do the same to Taiwan, an energy blockade. And you’re talking about such low reserves at this point, what happens to the global economy if Taiwan comes to a halt? I think it was McKinsey a year ago suggested that you’re talking about a trillion-dollar hit to global GDP if you take Taiwan offline.
Kevin: And you said they have 11 days, right now, of reserves.
David: Correct. Correct. So in this regard, I think Trump has set an unhealthy precedent in terms of a blockade and sort of an energy— I mean, at this point, if the Chinese wanted to do the same, they basically say, same playbook, “You did it, what’s wrong with us doing it?”
Kevin: Right, right. Well, it sounds like it’s coming to a head at this point. I mean, because we also have the midterm elections, and inflation is still on the minds of the people.
David: Yeah. I think Friday of last week was sufficiently terrifying in the global financial markets for Trump to suggest an end to the Iranian engagement.
Kevin: So you think it was just the turmoil that we had with a split force that-
David: Oh, yeah. He pays attention— Just like he’s claimed 50,000 on the Dow, look at our great success. To the degree that you see slippage in the financial markets or chaos in the financial markets, he’s hypersensitive, hypersensitive to it. So I don’t know what very soon means. I don’t know what mission accomplished means. I don’t know what he means by our objectives have been met.
Kevin: They’re still shooting missiles and drones.
David: Yeah, and I’m shocked and amazed that after, I don’t know how many hundreds of sorties and thousands of targets hit, seven to ten thousand targets hit. I don’t know how there’s anything left.
Kevin: Where are they coming from?
David: But they are.
Kevin: Right.
David: And the Strait of Hormuz is still under threat, and there’s still the capability of launching hypersonic missiles and throwing into the air any number of drones.
So we also had last week, we had PPI, Producer Price Index, it could have also been a strong warning to the Administration leading into the midterms. What was expected was a three-tenths percent increase. Instead, we got a 0.5 and that was on core. So if you’re taking out food and fuel, there’s your half percent increase, and factor in food and fuel, factor in fuel to the PPI, and it’s 0.7% increase as opposed to the 0.3 expected.
Kevin: And people really watch the gas price. I mean, they may not watch inflation, but they see what they’re paying at the pump.
David: Which suggests that with PPI surprising to the upside, CPI will probably, Consumer Price Index will probably surprise to the upside as well. And if we get past that $4.11 threshold—
Kevin: What is that? Why 4.11?
David: It’s the point that we hit back in 2008 with the last run in oil to 150. And it was the point at which the consumers were coming unglued. You could have put anything in front of them and it was pitchforks and people ready to tar and feather anybody in the oil business because it seemed like this was being done to us. Again, it’s politically consequential, and $4.11, if you breach that national average on gasoline prices, I think consumers will revolt in the midterms.
Kevin: Well, and the Trump administration has to know that midterms typically go to the other party. And so they’re already, they’re vying for good perceptions. But when we were talking at the meeting today, three scenarios were put forward. One scenario was a quick, decisive, complete victory for the United States. The second one would be a longer prolonged issue, and that could actually lead to many long-term problems. That’s the duration problem. And then the third would be some sort of negotiated settlement, which would probably have to include Russia and China because they’re so closely tied. And so the three scenarios, the middle one, the duration one you talked about, you said duration is probably going to be key as to the aspects of the effect of this war.
David: Weeks ago, that duration issue, that was the critical variable for us thinking about the Iran conflict. It remains the case. If you look at energy shocks and extended war, these are factors that increase the odds of recession dramatically. You could see consumer behavior become self-reinforcing here as well. Even if you’ve got a recessionary impact overseas and not in the United States, if prices at the pumps stay high enough long enough, back to the duration issue, you begin to see a shift in consumer dynamics and what are they spending on.
Kevin: Slowing the GDP.
David: Yeah. Correct. Correct. So you’ve got consumer expectations, which feed into inflation. You also have on the horizon expectations already shifting in terms of the duration of the conflict. The oil curve is shifting along with the yield curve, both higher levels and longer time frames being reflected on those curves.
Kevin: That’s interesting that you can look at that, but that’s true. When you look at the future’s markets, you can see what expectations are. And at this point, longer term oil. And that’s a reversal from when the war first started, if I remember right.
David: Well, so far the curve hasn’t gone the other direction. It still falls off pretty dramatically, but the whole curve has shifted higher, and as it shifted higher, it’s also extended further out. So the expectation is growing that it’s going to be here longer than we originally thought. I mean, again, two weeks ago you could have looked at the curve— The difference between two weeks ago and today, the curve is bumped and extended further at a higher level. So again, when you start thinking about the long-term inflationary consequences of this engagement, will it be here long enough to change consumer behavior in the US? It’s already at a level which is beyond critical in Asia and Europe.
Kevin: So if consumption does slow down, okay, we are in a midterm election year, if consumption slows down, a classic Keynesian would say, “Well, the government just needs to print some money and spend it.” Do you think that might be the response if that happens?
David: Yeah, it’s a fancy economic term, aggregate demand. To prop up aggregate demand—which is the sum total of demand within the economy, consumption in the economy—if that begins to fade, the consumer tightens his belt, classic Keynesian demand management kicks in, and government spending is supposed to fill the consumer gap so GDP contraction stays at a minimum—except that in this environment you’ve got deficit spending pre-conflict already on track, according to the Congressional Budget Office, to be $1.9 trillion. That’s the projected deficit for 2026.
Kevin: And we’re not including war spending right now either, are we?
David: Not included, not included. So how large a consumer gap would Donald Trump and Scott Bessent be willing to fill? If equities soften over the next six to nine months, you’ve got not only a diminishment in capital gains tax revenue, you’ve got that reverse wealth effect which would hit consumption pretty dramatically. Again, it’s just a question of, let’s say we spend an extra two, three hundred billion dollars in war spending, so 1.9, you’re already at 2.2.
Kevin: 2.1 or 2.
David: And then again, if the consumer’s retrenching, the government typically steps in. How much more are they willing to add, and what’s the threshold level at which the bond market begins to reappraise the stability of US fiscal position? And I don’t know what that threshold is, but that’s where I think you begin to see significant issues within the fixed income markets.
And it really is— We’re in this phase where people are focused on, investors are focused on, liquidity, and there is a preference for dollars. It doesn’t take much of a shift to start reconsidering solvency. That can be credit quality. It can also be duration risk. It can also be just sort of fiscal viability, which pressures rates higher. And these are all game changing elements.
Kevin: So a stronger dollar today could mean a much weaker dollar tomorrow. I mean, there’s no telling what could happen if that scenario plays out.
David: Yeah. I mean, when I recall, when I bring to mind these backdrop issues, you could reverse the first quarter dollar rally with a swift decline by year end. I mean, not a gradual decline, but—
Kevin: But a reversal.
David: A reversal. A sharp reversal. And at the same time witness a ratcheting higher in rates reflective of Treasury oversupply. And we already talked about, a few weeks ago, the trillions of dollars that have to be refinanced this year, existing debt which is coming due. You’ve got to satisfy investors with an adequate compensation. Interest rates have to reflect their demands for compensation for risk. And you start adding, is it 1.9? Is it 2.2? Is it 2.5? What’s the final tally for deficit spending in 2026?
The war hangs a question mark over that, which is very material for the fixed income markets. And I think you have the Fed and the Treasury put in a very awkward position. They can either watch the financial markets circle the drain or they can instead intervene. And how they intervene, to what degree they intervene, when they intervene, these are all relevant factors in order to keep the Trump Dow 50,000 narrative alive through the midterms.
Kevin: That costs some money. That costs some money.
Well, okay, so let’s talk about liquidity because that really is what’s affecting things right now. I mean, even I had to sell some gold and silver, we’re putting windows in on the house. And I mean, that’s what it was for. So I needed to raise liquidity, but I didn’t tap into the portion that I’m using for preservation. In other words, the difference between raising money for liquidity temporarily or holding long-term for preservation, you’re still encouraging that you add to that position.
David: Yeah. I mean, I think, again, looking at the macro backdrop, this is one of the best setups that gold has ever had, ever had, in US financial market history.
There is a place for liquidity, and certainly we keep adequate liquidity in the asset management side of our business. We’re close to 40% liquidity today. I mean, it’s not like we don’t prize short-term Treasuries or a cash equivalent position, but there’s also a place for conviction on the gold trade. And while I can’t argue with price action—I mean, the last week was ugly—I can see beyond the temporary price pressure to the enduring issues of our overindebtedness and of a significant monetary regime change. The Mideast conflict is in many respects helping to facilitate and codify a shift away from dollars.
Kevin: Yeah. So the dollar recycling is still being replaced by gold recycling through other currencies.
David: And I’m not talking about the immediate-tense investor liquidity preference, which boosts demand for dollars. I’m talking about global trade, and this is where global trade settlement is a far bigger issue. You’re changing the international financial plumbing as opposed to watching today’s preference for US dollars.
Kevin: Well, and even Iran is saying that they’ll only let ships through that are trading oil in other currencies, like Chinese yuan.
David: Yeah. I mean, the Chinese are settling oil in yuan, and the very large crude carriers getting through the Strait of Hormuz are either connected directly to Iran—China, India’s had a number of ships that have gone through—
Kevin: But these are all BRIC type of countries that are moving away from the dollar already.
David: Yeah. Largely anti-dollar-block countries that are seeing their VLCCs [very large crude carriers] get through the trade of Hormuz untouched, unscathed. Normal traffic’s 138 vessels per day. That’s what it was pre-conflict. Now it’s down to five to six per day. And again, those with safe passage are tied to that largely anti-dollar block.
So it is interesting that we see this codification away from dollars. I don’t have evidence that every one of those barrels that’s making it through Hormuz is being settled in yuan. I just can’t imagine that China would be interested in doing so, or that Iran would be interested in trading their oil in US dollars.
Kevin: Well, and it may not be yuan. It might be rubles. It might be rupee. I mean, these are countries that will trade their currencies for oil and then those oil countries will trade for gold.
David: Yeah. I think post-conflict we are not going back to the old petrodollar recycling. And at the margins, you see the changes. Russian barrels will trade more and more in rubles. Payments from China for the purchase of whether it’s Iranian oil or Russian oil will be in yuan or RMB. Indian purchases will be going forward in rupees. And so, at the margins we are codifying this demise of dollar hegemony.
Kevin: Well, and Morgan has brought this up, too. You guys actually brought this up at the last McAlvany Wealth meeting that we had in October, that possibly Scott Bessent and the Trump administration need to see the dollar lose that hegemony to some degree because of the burden of being a reserve currency at this point.
David: And the priority of reshoring jobs and building out our manufacturing base, it does imply a degraded dollar. I don’t think they want an uncontrolled decline, but if they saw a gradual decline, that would certainly be compatible with their larger policy objectives.
Kevin: So they might not be opposed to this disconnect that’s going on, fully.
David: Yeah. The question is how big of a decline it is, and that’s the difference between the dollar being on— At the end of this conflict in the Middle East, are we on the injury list or are we sort of in the casualty catalog?
Kevin: Right.
David: So I could imagine the current liquidity preference for US dollars getting purged as the annual deficit comes in north of 2025. So again, currently we have dollar strength. That can flip pretty fast with a reappraisal of US Treasuries and the value of the US dollar. At what price stability?, is the question. What are the trade-offs that the current administration, between Bessent and Trump, is willing to accept in order to maintain financial market stability into the midterms, to keep a lid on rates and to prevent interest costs from skinning the Treasury alive? Is yield curve control something that we can assume is slotted for the back half of 2026? Is it out of the question? I think it’s becoming more and more probable by the day. And where do you think gold goes in the context of desperate debt monetization?
Kevin: Sure.
David: This is again where I say my bullishness on gold is not biased or based on owning it and wanting to see it higher. I simply can’t imagine a world where policymakers navigate these challenges without significant reputational costs. And it’s loss of confidence tied to that reputational cost— It’s loss of confidence that I see reflected in the gold bull market. Price appreciation is proportional and directionally opposite to confidence. So, declining confidence, and that’s where gold begins to step up the pace.
Kevin: Right.
David: So the world is—at least from the perch that I sit in—the world is looking far less stable today than it was six weeks ago or six months ago or six years ago. And in the final analysis, gold is the preferred safe haven when solvency is on the line.
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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.
