“Print Without Limit,” Equals No Price Ceiling For Gold?

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The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

“Print Without Limit,” Equals No Price Ceiling For Gold?
May 13, 2020

If you understand a little about money and credit, this is an obvious instance of misdirection and, give them credit where credit is due, no pun intended, this is well-intentioned deceit. If you’re ignorant of money and credit, you’ve got the song from the monetary siren, and it’s sweet indeed. It’s intoxicating. It’s convincing. It’s alluring. It’s a promise of certainty in uncertain times, which sells very well to the uninitiated.

–David McAlvany

Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany. Back in 2008 you had us read a book that had just come out, written by a man who had spent his entire life in the markets. He had actually worked for Morgan Stanley when you were there and you read his comments. In fact, I think you said something about one of the reasons you re-entered the gold market was because of him.

David: Yeah in the early 2000s, I was reading an internal memo, and this was written by Barton Biggs, and he was talking about this crazy derivatives trader, and the crazy derivatives trader had in 1987 taken every stitch of money he had, plus family money. It all added up to about $60,000 and he shorted the market, coming into a 22% decline in a single day.

Kevin: He was like Jeopardy James: all in. He just pushed it all in.

David: He made a fortune and retired. So that was the story. And then he comes back around in the memo and says, well, maybe he’s crazy, maybe we’re crazy. And he was talking about this guy who was interested in gold. This is in the early 2000s. And I thought to myself, you know, this isn’t Stephen Roach, who was also an economist and kind of the perma-bear at Morgan Stanley. This is Barton Biggs, the perma-bull, and he’s sanctioning the ownership of gold and suggesting through this interesting narrative that you know occasionally you do hit it right and maybe this is the time to be owning metals again.

Kevin: And it definitely was, you know, Barton ended up retiring, but he wrote this book Wealth, War and Wisdom. That’s the one that you turned us on to and you know what we’re going through right now, he saw early on and he said, you know what? You better be ready to leave the system. Let me just read a quote, page 213, that really hit me, because right now, with all this money printing and I want to talk about that today, Dave, I think we need to go back and look at the paragraph that he wrote about Weimar, Germany in the early 1920s. Quoting Barton Biggs, “No chart can capture the stupendous ascent slope of true hyperinflation. Numbers actually do a better job. From 1919 to 1921, German CPI I Inflation was gradually rising from virtual price stability to a 2% annual rate. (Kevin Interjects: Sound familiar?) By June of 1922, inflation was at an annual rate of 4%. By September, 22%. By December, 68%. Then it really took off. In March 1923, it hit 285%, then 765, than 1.5 million in September.” And finally the number is just too big. I mean, it’s 152 trillion 221 million. The point is, gold went up that much because that’s how much the mark went down.

David: Well, last week on our quarterly conference call for the MAPs hard asset portfolios, this was the client only call. Lila Murphy responded to a question in the Q&A with recommended reading, and she mentioned The Theory of Money and Credit.

Kevin: By Mises…

David: Yeah, and it’s not an easy read, but it’s a very important read, a foundational book in her thinking as well as mine. The Theory of Money and Credit by Ludwig Von Mises is a leader in the Austrian Economic School of thought, and I don’t think it can be understated. The importance of credit has never been greater to understanding the financial markets, frailty and what we would see as future crisis. I want to be clear on this, that there’s opportunity that abounds in the midst of crisis, but not everyone who has eyes will see it. Not everyone who does see it will be willing to do something about it. It is very often that when people are under pressure that they freeze up, they don’t know how to take action.

Kevin: What I’m finding this last couple of weeks, Dave, is people also freeze up when things start to look like they’re stabilizing, and credit can give the illusion. When you can print money out of thin air or borrow unlimited amounts of money, you can give the illusion that maybe the crisis has passed.

David: So we want something different for our listeners to be able to not only identify opportunity but also be willing to step into it. And today we have central bankers across the globe that have come to underappreciate the fuel to flame characteristics of credit and the way it impacts speculative trades, particularly applied in sort of a late expansion cycle like we have now.

Kevin: Do you think it’s because they still are performing as if things were normal? In other words, they’ve only seen how things have been. Now things have changed. They’ve learned in the past that they could just apply credit to anything, and it works.

David: Yeah, I think that is an understanding that they have. It’s the norm. In the final analysis you have credit, which drives a more dramatic boom to bust cycle, and central bankers hold onto an interpretation of what they consider to be normal economic activity, and then they can ignore the fact that excess credit growth in the system is actually supercharging those numbers and just kind of want to go back over and over again to that idea of normal. How do we get back to these numbers? How do we get back to the growth trends that we were on? Not recognizing that credit had inflated those numbers to begin with. So the only way of perpetuating those same economic growth trends is to liberally pour on more credit on the flames. And it’s, you know, if it were pyrotechnics would be impressive. But it’s money and credit, and it is what adds to that classic boom and bust cycle.

Kevin: If we were just looking at U.S. figures it’d blow our mind. I mean, we’re talking multiple trillions of dollars just in the last eight weeks that have come into this market. But we’re not just looking at the United States. The whole world is responding with this attitude of adding fuel to the flame, so you’re not just talking about America.

David: No, global liquidity provision is off the charts. Doug Noland tallied the credit growth in China which is just…these are numbers just for the past month. Total aggregate financing jumped $435 billion for the month of April, and typically April is a slow month for lending. And so April of last year was $240 billion…

Kevin: Which we remarked at the time, was record. I mean, we were seeing record credit in China in 2019…

David: And this April was just off the charts. So this pushed system credit growth to $2 trillion for just the first four months of 2020. That’s 38% ahead of the comparable 2019 growth. And, as you say, 2019 was setting records. So our credit growth now in China 38% above where it was last year, record setting numbers, and now this is global liquidity, global credit growth, which makes for real issues in terms of global financial market fragility.

Kevin: What’s so destabilizing to me, Dave, is we’ve talked about this. We have seen this coming. We talked about how, when the global debt bubble starts to pop, they’re going to just continue to do this. But I’m still having a hard time. We talked about a month ago about how sleep has changed. We look at these things all the time. We’re seeing predictable things. Even though we saw this coming, it’s still, in a way, surprising us. And I know my wife and I, we’ve talked about it. We’re sleeping like rocks and waking up still not completely there. And I think it’s because we’re trying to figure out what the new normal is. So when you expect something you’re not necessarily always prepared for when it comes.

David: Right, and that’s even with anticipation being built in, it’s a little bit like watching a firecracker. You’ve got the fuse that’s burning. You can watch it. You know the explosion is going to happen. And yet you still jump with the explosion occurs…

Kevin: (laughs) That’s a good analogy.

David: You know it’ll happen. It’s still surprisingly disruptive. Lila Murphy was quoting Marc Faber on the client call, and I think it captures this point succinctly. We’re never prepared for what we expect. We’re never prepared for what we expect.

Kevin: Okay, so, let’s go back to China because if they’re just exploding their credit along with ours, what does that look like for the future of their ability to pay that back?

David: Well, a lot of the People’s Bank of China-generated credit is flowing through to the local governments, where regional lenders have been a point of concern for some time. Crisis in the Chinese credit markets, its eminent by the numbers. You look at the scale of their credit growth, the amount that it’s grown, and it clearly is dangerous. But it’s on a slow fuse, and a part of what determines the speed of that fuse is sort of the top down management system in the country.

Kevin: But it hasn’t popped yet, is what you’re saying.

David: Exactly, and it reminds me of Mark Twain portraying the characteristics of bankruptcy: he said slowly and then all at once. It just kind of lingers out there and then it’s done.

Kevin: Do you remember the book we both have, Mathematics and Humor? I think it’s by a guy named Paulos. He goes, I think it’s chapter 5, he goes into catastrophe math, and he shows on a chart where tension can build between two extremes, yet they still haven’t broken…like a bridge. We’ve used the example in the past of the bridge in Minnesota that held and held and held, but the bird poop apparently was weakening it. And then when it went, it was all at once.

David: It was a crappy day.

Kevin: (laughs) Oh, will that have to be edited? I don’t know. Sometimes this is an edited show boys and girls.

David: (laughs) No, I mean, I think I think the surprise will be there. The Chinese markets will implode, and we’ve waited, we’ve watched, but it’s still going to be a surprise.

Kevin: What do we watch for before that happens? I mean, is there a way of maybe smelling that out before it happens?

David: Well, certainly on our radar and what we talk about on a weekly basis is currency markets and the credit markets. And within the currency markets, you watch the RMB, the renminbi, and there’s a fairly reasonable pattern in the financial markets where your foreign exchange traders, your foreign currency traders, and your credit investors are your first movers and they see things and they react first. You see significant changes in those markets before you do, say for instance, in the stock market. So a significant drop in the RMB dollar exchange rate. We were looking at chats the other day on our call and, you know, 7:10 would signal meaningful capital flight there in China and a total disruption of the emerging market landscape because you already have emerging market currencies on the ropes. But if you brought the RMB to its knees, it might actually constitute real complicating factors for the whole global financial markets with the emerging markets being really taken out.

Kevin: You’ve brought up John Scott McAlvany, your brother, and talked about how, with martial arts, you know, you fight how you train. And I talk about the disorienting effect of all this. But actually, there are many things that, as we see happening, we’ve already rehearsed in our mind. And I’m wondering, should we look forward now and say, okay, what do we rehearse in the future? You know, we talked about engine power-out landings. You know, you rehearse that when you fly a plane, you hope it never happens. Well, right now this is happening. So what do we rehearse going forward in our mind that hasn’t happened yet?

David: Yeah, so I’d go back to that quote that Lila shared, “We’re never prepared for what we expect.” I think it’s helpful to do sort of a dress rehearsal, if you will, as it relates to the gold market and the step sequence ahead. And I think there’s a twofold opportunity in the precious metals market. Sometimes they talk about gold, and what I mean is gold and silver. I reference the gold market. It’s not to exclude silver, but there is a delay in responsiveness in the silver market, where it typically will do what gold does, but not precisely at the same time. There can be opportunities embedded in that, the latent movement. But here is the two-fold opportunity as I see it: first, we are watching a historical global currency debasement, and it’s harder to see because of any absolute measure of value being taken away. And in a time of universal fiat money, you’ve got all currency values that trade relative to one another.

Kevin: It reminds me of noise in a room. You know, when you study the science of information, they’re really big on the difference between signal vs. noise, and when I use ham radio, and I’m tuning the radio, there’s an awful lot of static, an awful lot of noise and then every once in a while, I’ll find somebody who’s plinking out Morse code and start to copy. But that’s the signal. The problem right now is all we have is noise. As you do the dial, all the currencies are falling. The dollar may be falling a little bit less, like we brought out last week, but how do you differentiate something if it’s not being relatable to something real?

David: And there are some epic fails out there. If you’re talking about the, you know, Brazilian real being down 30%, if you’re talking about the Mexican peso being down over 20%, if you’re talking about the Argentine currency just so far this year being down 11%. Those epic fails do stand out. But you imagine a classroom of students and you’ve got sort of C minus to D plus students, every one of them, there’s a temptation to shift the curve, normalize poor to mediocre grades. And if you have no A or B students, this is essentially what we’ve done with our money. We could see the equivalent of failing grades. We tend to ignore those failing grades in the absence of any differentiation. You need the contrast between an A student and a D student to not normalize poor grades as, you know, what you expect and how the curve is defined.

Kevin: So the true yardstick, okay, the true yardstick has to be something real, and historically that has been gold.

David: Yeah, and that’s the first opportunity. That’s clearly where I see a gain in value for those who own precious metals. Gold is going to, in my opinion, it’s going to its inflation adjusted value: above 2500 in US dollar terms. And in all likelihood, it’ll double from there to $5000 an ounce. And I’ve looked at $5000 an ounce and the inflation adjusted figures for gold, but going back to 2009 I remember discussing that on a Bloomberg Television interview in the London studio, and you know, at that point it was obvious that the secular bull market in gold was in motion. We stepped out of that between 2013 and 2015. A cyclical bear market notwithstanding, and you know, we’ve had certainly a recovery in the gold price since then, and I think, you know, basically a reengagement with that long-term secular bull market in gold. Where do these bull markets end? Typically, they’ve exhausted their economic upside at double the inflation adjusted price.

Kevin: And we just talked about Barton Biggs’ book. You know, that single paragraph that I read at the beginning of the show? It can go to quadrillions if the dollar goes down that much. And so for those who are holding their nose now going, “Oh, is this just another show that’s predicting $5000 gold?” (laughs) That’s not the case.

David: No, no, no. I mean, if central planners move into credit creation overdrive and they print without limit, theoretically there’s no price ceiling for gold, right? Because, I mean, you’re talking about unlimited monetary debasement, unlimited QE. That translates to gold and silver prices which we’re not prepared for. We can’t imagine, even if theoretically we can expect it…

Kevin: That’s bread prices. That’s car prices. That everything. Yeah, we’re talking everything going up like that.

David: Right, so the first opportunity is in preserving the purchasing power of your dollars by being in an asset that, in extremis, marks to market the impacted evaluation. Right? So this is insurance. You want insurance. You keep what you have, and that might not seem like a super compelling opportunity, but in a minute we’ll consider the second step, if you will. The second part.

Kevin: Okay, so for the poor guy who’s going all right, well, I just I can’t wait for inflation because I want my gold to go up. That’s really, that’s counter-productive, isn’t it?

David: Well, in some senses, it is. I always prefer deflation to inflation because in a deflation you might see an increase in purchasing power with your gold by, you know, 50% or two times or 3, 5, 10 times, and you might actually have a tax write off should the gold price shrink. You’re talking about, again, the gold price going down, that everything else going down far more, right? So you may have a tax write off, plus an increase in your financial footprint. In an inflation or super inflation, you may sit on top of a huge capital gain, pay out a huge amount to the I.R.S. before you ever get to redeploy that capital, right? So, like I’ve said before that the ideal scenario is one that most people probably don’t appreciate. Take a loss on your gold holdings and use the proceeds to buy assets at a steep discount.

Kevin: You know, we did that back in the 1990s with the gold to silver ratio, because gold wasn’t going up in the 1990s, and so, often times we would see actually, several times in the 1990s we saw gold going down and buying twice as much silver or vice versa. Right? And we were able to actually take a loss on taxes and double up on the metal.

David: Right, so, I mean, in a world of over leveraged corporate balance sheets, this is where I’d say, translating gold into shares. Is this impossible? No, no. In a world of over-leveraged corporate balance sheets, you can imagine liabilities being so great that they bring many companies to their knees with assets changing hands for virtually nothing. And you, when, if you maintain liquidity and maintain purchasing power…

Kevin: Do you think that’s going to happen? I mean, if you had to pick right now, I say, okay, Dave, you have to put your numbers on one or the other. Do you believe it is inflation or deflation?

David: As we’ve said before, there’s a combination of asset prices that are impacted by deflation. But if you’re talking about sort of a systemic trend, currency debasement is already on display and it’s more likely to continue. And again, look at what central bankers are doing. They’re taking off the gloves and doing whatever it takes to win in the fight against asset price deflation. And that’s where currency debasement is for them, a small price to pay for a continuation of a growth trend. Gold prices soaring are a result of central bankers doing what they’re doing.

Kevin: Okay, so step one. What you’re talking about is two steps, the opportunities, step one is to make sure you get your cash. Your liquid fiat money put into gold. But then there’s the next step, which is step two. This is the second opportunity.

David: If you looked at the insurance function of gold, you’re saying basically that it’s providing me with liquidity and purchasing power when other asset classes are under duress, and to be able to translate liquidity and purchasing power into other assets, that’s the second opportunity. The second opportunity requires a major transition. You have to leave the security of your precious metals holdings to go into other assets, and this is what I’ve always referred to as a reduction strategy. And when I say leave, I don’t mean leave entirely. We’re talking about paring back, reducing and taking those proceeds in a different direction. That’s precisely what Richard Rainwater orchestrated for the Bass brothers coming out of the 1970s inflation. They reduced their inflation sensitive asset.

Kevin: They had ridden the gold market all the way up…

David: And they gained tremendously, transitioning to equities in the early 1980s. It was a variation on the Texas two-step. This is the reason why we launched our asset management group in 2008, was to basically help coordinate and teach this particular dance: the Texas two-step.

Kevin: Okay, so for learning this Texas two-step the second step, do you prefer stocks or bonds? I mean, what do you do if we’re rehearsing forward, what would you go into?

David: Yeah, I mean, I think I like stocks and bonds. You find that when gold does pretty well, financial assets, both stocks and bonds are punished. They they don’t do well. We entered a bull market in stocks and entered a bull market in bonds at the same time, so again, as the Bass brothers are moving from land and oil assets, and gold and real things, guess what they’re doing? They’re moving to stocks and bonds, and both of those entered a bull market in 1982, finished a bear market there in the early eighties. Both stocks and bonds tracked with each other through a crisis period and then emerged into a growth phase simultaneously. So I prefer stocks and bonds because, well, for me, if I’m building out of portfolio, liquidity is a priority, as is the ability to fine-tune asset holdings within a diversified portfolio to levels that mitigate a lot of risk just by position size.

Kevin: And again just to repeat, we’re not talking about this strategy being employed right now. We are future thinking when these things have already devalued fully.

David: Well, I’d say it in two ways. One, to some degree it’s a strategy that we employ now because we are interested in stocks and bonds where we can find value, and to the degree that we cannot find value, you’ll find us with larger cash holdings in anticipation of being able to buy value. But that management process is in play. What has to be rehearsed for most people interested in gold and silver is the idea that they would ever, under any circumstances, transition ounces to shares or ounces to acres or ounces to square feet. But where you’re making some sort of a value exchange, using your precious metals as currency to go redeploy to something more productive.

Kevin: That employs the Dow gold ratio.

David: Yeah, so when we allocate to a position we may allocate to something, it’s a fraction of a percent. And if I was moving out of gold into real estate or out of gold into a privately held business, you’re talking about a much chunkier purchase size and a much greater concentration of risk. So one of the things that I like about equity and bond portfolios is that you can get very precise with how much money you’re willing to put at risk at a particular time through that position sizing function. So the second opportunity is to translate the benefits of insurance ownership, which we categorize precious metals, generally speaking as insurance ownership, translate the benefits into ownership of other assets…

Kevin: Which could possibly bring income. I mean, that is often times when we’re talking to a client we will say, “What do you need?” They will say “you know, I really need income.”

David: We do that today, certainly, with a strong income component coming from dividends, and so when we think of stocks and bonds, we are looking at a mandate which says seek total return, seek total return as a value proposition for your clients and that total return is a combination of capital gains and income. Dividends are part of the total return equation. So transitioning from metals to other assets doesn’t mean that there is necessarily an immediate catalyst for growth in those other assets, for capital gains in those other assets. So it may take six months, 12 months it may take years for a bottom in the market to be put in and for there to be a catalyst for upside in those particular investments. So our view is, be paid while you wait right, and so that income component is really critical, particularly in transition. So be paid while you wait. That’s critical.

Kevin: I love that phrase because being paid while you wait allows you to continue to accumulate and not necessarily continually go backwards, even if the principal value is going down. But I had a conversation with a man. He was the one of five sons of a client of mine that had passed away a few years ago. But this was the first time I actually talked to this particular son, and he called me up. He said, “Hey, Kevin, I really appreciate everything you did for my dad. I see that gold’s really high, So I’m going to go ahead and sell mine, my inheritance.” It was about $100,000. And I got a chance to talk to him and we went back through. And I just said, Do you think gold’s high if…and we just went through various items going on right now. By the time the call was done, he realized not only was gold not high, and he shouldn’t be selling it yet, but he’s starting to think about buying more.

David: We’re not opposed to the idea of selling gold or taking profits, but the question is, what are the larger factors driving that kind of a decision? And is this the time? And I’m not talking about, you know, gold could be down $50 tomorrow. That’s not what I’m talking about.

Kevin: You’re looking longer.

David: That’s correct.

Kevin: How about silver, though? Okay, because silver and platinum have been behaving differently than gold through this.

David: I think they’re sending a very important signal. And judging by actually the decline in the price of silver year to date and the non-participation of your smaller mining companies in this recent run up in gold, your large cap gold companies have done very well. And that is where the reward has been primarily. But I would say that the precious metals remain an unloved sector by the vast majority of investors. And that’s good…

Kevin: Right, the masses, the masses don’t see it yet.

David: And frankly, it’s the mass, when the masses are interested, we’ve got this idea of poor man’s gold. They’re interested in silver, they’re interested in small cap mining companies and things like that. They’re not as interested in large cap or a gold bar. You know, gold’s up very little year to date. It’s still positive, but, you know, relative to…

Kevin: Relative to what, Dave? What’s up right now?

David: No, you’re right, so but I guess what I’m saying is, when you look at the silver price and it not participating to this point, it’s helpful. Because I guess what I’m saying is you’ve got potential buyers and converting those potential buyers to actual buyers translates into further price gains. It’s a little bit like potential energy and actual energy in motion, where all of a sudden the price is impacted. And I can count a very large audience of people who will come into the gold space and have yet to show themselves. There are no footprints. Their footprints are not present.

Kevin: But they’re not there, and, you know, to quote your dad, “Over and over and over and over, the majority is always wrong.” But there’s a small cadre of people, a small group of guys right now that are going heavy into gold. And they seem to have been guys who have gone heavy into other things at the right time, all through their lifetime.

David: Oh, yeah, these are guys who are not afraid of making big bets and are willing to do a lot of analysis on the front end, position assets and be patient. You’ve got the buyers of the last six months that our guys that understand the implications of excess money and credit in the system. In fact, one of them, Ray Dalio, is actually working on a book right now on the history of money and credit. Coming back to, you know, I don’t know how much he’s going to lean on Von Mises, but there will be traces of it because anyone studying the history of money and credit has to at some point bump into some very fundamental ideas.

Kevin: I’m looking forward to that book because the Von Mises book I have, along with other Von Mises books…

David: It’s painful to be frank, it’s painful.

Kevin: Yeah, I’ve got a cat that opens the door to see if she can come down and see me. And I’ve got books, very heavy books that I keep the door closed so that I’m left alone.

David: (laughs) That’s one of them!

Kevin: Yeah, the Von Mises book that you recommended earlier, The Theory of Money and Credit, yeah. But Dalio’s writing, that’s worth reading.

David: So I guess if you’re going to get started with Von Mises something a little easier, start with Human Action and then go to The Theory of Money and Credit. Major gold purchasing in 2019 and 2020 has come from Ray Dalio, Mark Mobius, Sam Zell, David Einhorn, Stanley Druckenmiller, Seth Klarman, Paul Tudor Jones, Jeffrey Gundlach… These are billionaire asset managers that get it. And frankly, some of them, like Sam, made his money in real estate, right? So that there is a recognition of some…

Kevin: They’re not gold bugs necessarily…

David: No, no, no, none of them are. I mean, you’ve got some history with Mark Mobius going back to the eighties where he hated the stuff. He was working for Franklin Funds. This is the Franklin Templeton Group. And you know. So, no, these are guys who are reading the asset class in light of the environment we’re in and seeing that insurance is essential.

Kevin: These are also not passive investor guys. These are guys who make their own decisions. And, you know, for the last decade, you and I have lamented over the audience of passive investors that have come into the market. They buy their 2032 fund, you know, because that’s when they’re going to retire or whatever, and they don’t even know what they own. Well, that’s momentum investing, that is passive investing. There are no real decisions. Those people are now the sheeple.

David: Yeah, ironically, the group that I just gave you, these guys didn’t make much money in the last 5 to 10 years because if you were intelligently engaged with the markets, there was no reward for it. It was buy an index fund and call it good. And so in any other period of time where it wasn’t being driven, results or returns weren’t being driven primarily by central bank monetary policy, these guys were making big calls and making big money.

Kevin: Well, what about the guys who just go along to get along, the guys who sort of do what everybody else is doing because it’s worked?

David: Yeah, and I think this is where all of a sudden something has changed. The environment has shifted. It doesn’t favor the buy and hold investor in stocks. It doesn’t favor the guy who has bought an index fund and is hoping for the best. It doesn’t favor the target date fund. There is a different class of asset manager that lives by the kind of got to go along to get along attitude, don’t understand gold because they don’t understand history or credit or the value of sound currency. Frankly, they don’t understand economics. So when you hear the siren song of modern monetary theory, that’s sort of hanging sweetly in the air, this is the kind of money manager that falls prey to the appeal of, you can have it all. You can have it all. You can have something for nothing, and it just makes sense, because again, it’s kind of, just go along with it. Stocks for the long run, everything’s going to be fine. It’s always pulled through.

Kevin: You know, the volatility index you’ve brought up all through the years and said, this is ridiculous. The volatility index, up until just recently, has signaled absolute certainty in the market. Now go along to get along, or just going with the sheeple, that works when you have absolute certainty in the market. But, boy, did it come at a cost.

David: Well, last year, you might recall a number of times we talked about unemployment and the VIX chart, looking almost identical where unemployment comes down and down and down and down and down. And if you’re imagining this as a chart, unemployment reaches record lows, and then guess what happens? It moves the other direction very quickly. Unemployment, volatility index, interest rates. They all tend to tell you something. But actually, at the moment where their message is clearest, that everything is going to be fine, that’s when all hell breaks loose. We saw that with the unemployment number here recently. We go from a 3% number to a 16% number, the fastest ascent in recorded history in terms of US employment figures, getting us to a level we haven’t seen since the 1930s. Basically overnight. VIX did the same thing in March. We’ve got interest rates which we are still sitting on. But this is the dynamic that you see. There’s one message, and it’s actually not a true message. What we do have is investors with this idea of certainty, certainty of outcomes, certainty of outcome that the central bank promise, you just buy it lock, stock and barrel. We will have a peaceful market environment.

Kevin: Well who doesn’t want certainty? You and I were talking a little bit about theology and how certain theology methods have a lust. I heard a Doctor of Theology saying, “There’s a lust for certainty and a lot of times it gets people trapped into a theology that is really untenable.” We have this, I don’t know if I have a lust for certainty, but I can tell you, I really do appreciate when I opened up the closet, I can find white shirts, khaki pants, you know, loafers. I wear just about the same thing every day. I like the certainty of that. But the central bankers provide certainty based on not just borrowing, but they’re stealing from the future to give it to you.

David: Everybody is looking for certainty, and sometimes we can pretend to have it. Central bankers are, in that sense, they’re the modern-day priesthood because…

Kevin: Yeah, like Thomas Sedlacek said.

David: Yeah, because they alone in the field of money and credit, presume to deliver certainty of outcomes. And it’s about a future that is unknown, unknowable. But they’re pretending and conveying that they have certainty of what is in the future. And at what price are they attempting to deliver those results?

Kevin: Okay, but there are people buying gold. We talked about this small cadre of people, but the ETFs are starting to see an increase in purchasing of gold, too, so maybe worldwide there’s a realization that this certainty is ending.

David: In recent months, we’ve talked about the fact that gold is not at new highs in U.S. dollar terms, but it is at new highs in virtually every other currency. So we’ve got a breakout and it’s showing what kind of traffic you’re seeing into the gold market.

Kevin: And that happened before COVID. That was happening before COVID.

David: That’s correct. That’s correct. The U.S. dollar price is close to 1700 versus 1920 we’re a few hundred bucks away from the all-time highs. But the traffic is very interesting because we’re not at new all-time highs. And yet we’re blowing away the kind of volume statistics that we saw in the last major run up, the first four months of the year. ETF purchases of gold are 13.2 million ounces, and at that pace, at that pace, we could see 40 million ounces taken off the market this year.

Kevin: What was it in 2009?

David: Ah, about half that, 20 million for the year. So we’re talking about double the record set in 2009. If we get to 40 million, that’s the equivalent of the last four years of purchasing packed into one. So far, what we’re talking about is sophisticated money that is ahead of the curve. It’s the big money coming in right now, and they’re asking that classic question: QE or not to QE? That is the question.

Kevin: It’s all an illusion. There was a book that you and I read. In fact, I have to admit, my wife makes me go through my books, and if I add new ones, she’s like, you know, you need to cull some of these. Magic and Showmanship. I can’t remember the author, but Magic and Showmanship. It’s a book I own three or four copies of because I couldn’t find it so I’d buy another one.

David: No, no, Catcher in the Rye…How many copies do you have? Catcher in the Rye?

Kevin: No tinfoil hats. No, none of that. But the point is, the reason I liked the book. I don’t even know how to do magic, okay, but I love the way that it explained how a magic show works and how the illusion is built. Because there are parallels with the central banking community and in so many other areas, politics…

David: Well and so there’s two audiences in the markets today. The folks who have asked the question, QE or not to QE? And the answer is already there. They already have the answer. Then you get the other crowd, which is mesmerized by the magicians. Magic is more about showmanship, more about illusion, more about misdirection than it is about some woo woo spiritually force beyond nature. You’ve got Central Bank magic, it is all of these things: showmanship, illusion, misdirection, from which comes the audience’s participation and solidification of the act. If the audience doesn’t buy it, the act is a giant fail.

Kevin: Right, if they see where the coin went when it supposedly disappeared, you’re done. (laughs)

David: So, the gentleman I mentioned earlier, these are your A list skeptics.

Kevin: Gundlach, Mobius, yeah…

David: They see through the charade. They know that the props being used come at a very high cost, and we’re back to money and credit. Back to money and credit. If you understand a little about money and credit, this is an obvious instance of misdirection, and – give them credit where credit is due, no pun intended – well-intentioned deceit. This is well-intentioned deceit. If you’re ignorant of money and credit, and you’ve got the song from the monetary siren and it’s sweet indeed, it’s intoxicating. It’s convincing, its alluring. It’s a promise of certainty in uncertain times, which sells very well to the uninitiated.

Kevin: You know, you talked about well-intentioned deceit…one of the things that’s been a real wake up call for me, Dave, you know, because I’ve spent 33 years doing this, but really the last 13, you and I talking not only to each other, but to people who are actually part of the central banking community. There’s not a one of them that we’ve had on the show that are not well intentioned. These are people who, they just want to do well. And actually they’re not trying to deceive. But they realize now that if the deception doesn’t continue, they’re very, very fearful of the outcome.

David: If the belief does not continue. And so it’s a question of what do we have to do to maintain that sense of belief and confidence?

Kevin: Pacification.

David: So, I mean, we still have, thinking of the golden and silver market, we still have the momentum traders. We still have the late-to-the-party investors who have yet to transition away from the trading sardines, your fang stocks, the Apple, the Amazon, the Facebooks and have any position in the metals.

Kevin: They just want to go back to normal, what their normal has been.

David: So to me, looking at silver in particular, silver is a marker for which chapter we’re in in this story. And I mean, if you think about it, silver is like the equivalent of a small cap stock. You can’t move significant quantities of money into or out of a very small company, or, in this case, a very small market.

Kevin: Then you’re saying you can’t do that with silver either because it’s too thin.

David: You will significantly impact the price up or down. So smart money doesn’t, you know, there’s a couple things going on. They don’t relish the competition, and as they begin to initiate significant positions, what silver does is it sends a fairly dramatic signal of activity. You can put billions and billions and billions of dollars into the gold market, and no one hardly notices. But you put a fraction of that into the silver market and it pops. And so I think that’s still on the horizon as poor man’s gold comes into favor later on in the cycle. Again, it tells you where we’re at in the cycle. Has it gone too far? Are the metals overpriced? Are there too many people participating? Can the market move any farther? And I think the answer is yes.

Kevin: Right. So, Dave, what you’re saying is it’s nowhere near being done. So this gentleman who called, this son, this one of five who wanted to sell his gold because he thought it was high, we’re at the beginning stages of a market, not the end.

David: We haven’t exhausted the efforts of the central banks to try to maintain a sense of normalcy, and just, you know, keep it going forward. You know, when I think of gold and silver and the potential for them to either triple, quadruple, quintuple in price over the next several years, it’s on this basis, we look at gold. Since 2015, we’ve put in the lows of 1050. It’s up 62%.

Kevin: That was the year, by the way you decided that we were going to as an office do a half Ironman. I was talking to my wife about that. So just putting it in perspective for me four years ago, you know, five years ago I made the call. This is crazy, but I’m going to start training to do this. That was five years ago. So gold has risen 62% since we started training for the half Ironman.

David: And you notice that we started training in 2015, a year in which coping mechanisms were very popular, at least at my house they were. And so, yes, when the market’s under pressure and gold has dropped from 1920 to 1050 it’s about time to do something productive…

Kevin: Right, physical, physical. Let’s get physical.

David: (laughs) Let’s get physical. No, so, this is important. The rate of change for any asset if you are increasing rapidly, say, 100% or 150% in a single year, 12 months, that typically warns you when the end is near or getting nearer.

Kevin: So it’s if it’s doubling or more every year…at that point you’re…

David: Yeah, 62% over a 4.5 year period? No, no, I mean, that’s not excessive. We’re just getting warmed up, and we have yet to see the man on the street come into the market as evidenced by, again, your small cap miners as evidenced by your silver price. And when you start to see that move, silver above 25 is starting to send a signal that yep, we’re now moving into a phase of greater popularity. And, of course, silver would be the first to probably get to that 100-150% increase in value. The interesting thing about that is that’s a doubling of the price of silver. We’ve already been to 45, almost $50 an ounce, so we’ve got a long way to run before silver, and that’s … so silver is not the defining asset here. I think gold is what defines the trend, and the smaller asset is what kind of follows. I’ve always likened it to engine and caboose. The caboose gets a little bit of whip as it comes around the corner, following the engine, which leads the charge.

Kevin: Yeah, just to put it in perspective silver usually tops out on the gold silver ratio. If you have $1500 gold, which you know we’re 200 bucks above that now. But if you have $1500 gold, you have $50 silver at the topping range because it’s a 30:1 or 31:1 ratio, typically when silver will top on that gold silver ratio fluctuation pattern. So if we have $1700 gold, it’s higher than that last high. If we have $2000 gold, you can do the math. So silver should get beyond that $50 range that we’ve seen a couple of times.

David: Right, when I talked to my kids about when they should be trading out of their silver and moving to gold, you know, they don’t understand the ratio as much as they do a particular price. So I’ll mention a price to them, but the only reason it’s relevant is because it relates according to the gold silver ratio to gold. And so for me to bandy numbers like $75 to $125 an ounce, it relates to a 40 or 50 to 1 ratio and, yes, higher gold prices. But I don’t think those are excessive numbers. Part of that is when you back up and look at the U.S. economy, we’re not done on the downside.

Kevin: Well, you talked about us not being prepared for what we expect. I’m not prepared for the depressionary numbers that are going to be coming in. I mean, the unemployment numbers, the drop in GDP. What do you think the drop in GDP will be this year?

David: Well, lean on Kevin Hassett. He is Trump’s senior economic adviser. And, you know, he was expecting in the second quarter a decline of 30% in the U.S. Economy. This is the same guy that wrote the book titled Dow 36,000 back in 1999.

Kevin: …so he’s a bull, generally.

David: Yeah, generally very bullish, but to say, yeah, the U.S. economy in the second quarter will see contraction by 30%, you know, I mean, what that means is you’ve got stirrings of political desperation. You’ve got a desire amongst the political class for unlimited spending. Debt levels are already on track for a $4-4.5 trillion increase…

Kevin: That’s incredible.

David: The financing on that paper is not lined up yet. So you get trillions in stimulus already in motion from the Fed and Treasury. More being discussed by politicians. Is it a surprise? Is it a surprise that Smart Money has decided to hedge their bets? Again, you’ve got folks who are clamoring to own FANG stocks today. Listen, I know some professional investors who just can’t get enough of the momentum trend in Facebook and Apple. And you know, they’re the ones who are out buying semiconductors and thinking that this just makes sense. How can you lose? My point is, there are a lot of people who will ultimately be converted from the long equity side to the long gold side. The cachet of gold buyers has not been exhausted.

Kevin: Well you talk about the people who are still wanting to go into Fang stocks, it’s because they love the Federal Reserve. The Federal Reserve has made many people wealthy before they got poor the last couple of weeks or the last couple of months, rather. But there is this confidence and this love like we had even going back to the Greenspan years. Okay, Greenspan’s got it. Well Greenspan left right before the collapse. Okay, he exited stage left. I saw the same thing with Volcker. When I first came to work for your dad in 1987, Paul Volcker was there and it was like, oh, he’s going to retire, here comes Alan Greenspan. We had the largest crash in the stock market in October. Nobody saw it coming except your dad and a couple of other people. But it seems that when these Fed chairman step aside, there’s something horrible about to happen.

David: Well in this case you’ve got confidence in the Fed, and in fact you’ve got Wall Street Journal talking about it. Confidence in the Fed share hits highest point since the Greenspan era.

So that’s happening. And juxtapose that with what Doug Nolan says, you know, COVID is striking mercilessly at peak fragility, and really, the story is things are so bad it takes unlimited spending. But now you’ve got this semi-virtuous but very dangerous cycle of, if things are this bad and the Fed is willing to do anything to make it up, go buy stock because the Fed’s got your back, what could go wrong? What could go wrong in that scenario? Nolan goes on to note that you’ve got 20 million jobs lost in April, and yet the S&P 500 returned almost 13% during the month. Just let that sink in. NASDAQ composite surges 15.5%. 20 million jobs lost in the month of April. Talk about price divergence from the fundamentals. Last week we saw the market on Friday trade up 455 points. As you are announcing, the day you are announcing the worst unemployment rate since the Great Depression, right? So how are investors reacting? Well, gosh, if it’s that bad, that means they must be willing to spend trillions more yet again.

Kevin: In a way, I mean, talk about playing the odds. With the economy as bad as it is, they’re still playing for the Fed bailout. I’ll give you an analogy. Okay, Right before a tsunami, the tide goes out and there’s all this stuff that’s exposed on the beach that you would never see before. And they are…literally before the tsunami in Banda Aceh, you had people who were running out and collecting seashells and things that they had never seen before because there was, what, half a mile of beach that they had never seen before. What happens after that?

David: Well, I mean, we’ve talked a little about China. We’ve talked a little about the U.S. and economic contraction here, as we consider going back to work…remains to be seen how quickly we will see those employment numbers fixed. We haven’t said anything about what’s happening in Europe at present. And this is what’s fascinating because you’ve got the German Constitutional Court ruling that the European Central Bank has exceeded its legal mandate. And it has strayed from the monetary realm into broad economic policymaking through their quantitative easing efforts, through buying particular funding, particular bond purchases.

Kevin: Well, and you talked to Otmar Issing back what, 11 years ago? Yeah, he was the head of the European Central Bank. He was sort of the grandfather of the euro. And he said that a day like this was coming because you asked him, you talked about okay, The European Central Bank is a financial institution, but when does it get into the political side? Because it’s very hard to administrate economic policy without having countries all on the same page. Now Germany’s saying, they’re crying foul.

David: You know, in that list of people that I mentioned earlier, every one of them is a macro thinker. Every one of them is aware of not only what’s happening in the United States and in China, but they’re interested in everything everywhere because it all matters and it’s all supposed to matter. And in this case, you’ve got, well, we have our own hands full with uncertainty this side of the pond, the United States. But you’ve got the euro, which hangs in the balance. You’ve got the European Court of Justice, which is going to have a very tough time working this out with the Germans, because the Germans have basically said, we object. We object to QE, you’ve overstepped your bounds. It’s gone beyond funding a bailout to now funding governmental initiatives. Earlier you mentioned 1919 to 1924. Of course it’s the Germans that object to QE. They know this history. They know this history. For those macro thinkers who get it, who are adding up the pieces and saying, we’ve got a position for this, they know the history too.