Podcast: Play in new window
- Silver to Gold Ratio Trade: How & When?
- Silver Is Designated “Strategic”
- Will Premiums Return To Pre-1933 Graded Coins?
“The question on global monetary reset. I think we’re in the middle of a global monetary reset. The move away from invoice settlement in dollars and reserving by central banks in gold ounces rather than Treasuries is a part of a reorientation away from the post-Bretton Woods system in which the dollar was privileged and has held monopoly status. You have the emerging markets, you have the BRICS. They’re essentially done. The evolution is the reset.” —David McAlvany
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Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany.
Well, David, 17 years. I think this is our 17th question and answer. When we did our first question and answer, George Bush was president. I was just thinking about that. We were in the global financial crisis at that time. Remember that?
David: Yeah, it was a long time ago. And there were many topics that still are near and dear to our clients’ hearts, and some echoes even from back in those days. So, looking forward to getting into the questions, and obviously we’re open to expanding this Q&A on a personal basis if you want to reach out to an advisor here at either McAlvany Precious Metals or McAlvany Wealth Management in the new year, and—anticipating the end of the year—Merry Christmas and Happy New Year. You’ll be listening to the first episode as it stretches through the Christmas holidays, enjoy your family and focus on the things that matter most. And then in the new year, you’ll have the second iteration of the Q&A, and we’ll be back to normal recording in January.
Kevin: Yeah. And thank you. You listeners are like family. In fact, we’ve got a couple of questions that have come in from people who, Dave, they’ve listened 17 years. So thank you very much for your response. And yeah, if you want to contact an advisor here, our number is 800-525-9556. And so please don’t hesitate to call.
First question is from James, and it’s very simple one, Dave. It’s “at what point do you start thinking about moving your silver to gold?” Perfect timing for that question.
David: It is. And it depends on the ratio that you started at. You’re looking to capture a 30 to 50 point gain. That is the objective. So if you’re looking at the ratio, and again, you’re just dividing the price of gold by the price of silver to see the ounce equivalence. And as recently as the first of this year, we were in the 80s, 90s. We’ve even clipped into the 100 range this year. And we’re currently in the low 60s. So below 60, I would swap 10% of my silver position for gold. At 50:1 on the ratio, get a little bit more aggressive, 25% of what remains.
Kevin: Okay.
David: At 40:1, another 25% of what remains. And at 30:1 on the ratio, 50% of what remains. And at under 20:1, I think I would finish the conversions unless there’s silver that you want to retain indefinitely. So 30 points is a better fit if you’re getting started in an IRA as the tax on gains is not taking a bite out of the ounce gains and the compounding effect that you have. So you can be a little bit more aggressive inside of an IRA because you don’t have the tax hit to pay. Right. And a 40 to 50 point swing would be the initial trigger in a taxable account to equalize the tax hit.
Obviously, the more points you capture, the greater the benefit, but the charts of the gold/silver ratio suggests that capturing the maximum spread in points is in fact a very rare event. So better to tighten up the range and capture greater frequency. The pattern of the last two decades has diverged from earlier periods with the lows in the ratio being higher and higher. If retail investors flock to silver, maybe, maybe we go back to the lower numbers, 30, 20, 15.
Kevin: So you would say incremental is the best way to trade.
David: Yeah. The best way to trade is incrementally, and give yourself a break. There is no perfect number except in retrospect.
Kevin: Okay. Well, our next question is from Steve. He said, “On the December 10th commentary, David said he would be a buyer of stocks when the Dow/gold ratio reaches 3:1, and pounding the table at 1:1. Would he be a buyer at 4:1 or higher, or is 3:1 where he starts pivoting from gold to productive assets?
“I don’t currently own silver. Would it be wise to start buying silver now after the huge gains we have this year? Currently, unless there’s a big pullback unrelated to the stock market tanking and/or the economy slipping into recession, my plan is to wait until the stock market tanks, like 2008, 2009, and drag silver down with it, and then buy at that point. Does that current plan make sense, or should I start buying now? Thanks you guys so much for all that you do. You’re a blessing to us all. Have a wonderful Christmas and a happy New Year.”
David: Let’s dive in on the Dow/gold ratio.
Kevin: Yeah, start there.
David: I think it depends on how heavily weighted you are in the precious metals to begin with. With a heavier weighting in metals, say one third of liquid assets, you’ll see the proportions swell to 40 or 50 or 60% of liquid assets in the context of a bull market where prices are expanding, and as a percentage of your liquid assets it’s a greater percentage. So a third of liquid assets, again, I would look at the reallocation in smaller chunks more frequently if you have a very healthy allocation to metals. I would consider 6:1 as the starting point, and probably move 10 to 15% of metals in the direction of equities. At 5:1, an additional 10 to 15% of remaining ounces, 4:1, similarly, maybe 15 to 20%. As you get to lower numbers, you’re increasing the scale of the move.
Kevin: Right. But you’re still just reducing the remaining balance, is what you’re saying.
David: That’s correct. So 3:1, 15 to 20%, 2:1, 25 to 35%, at 1:1, 50% of what remains. And it’s a reduction strategy for ounces. It’s not an elimination strategy. It’s not an exit strategy. That ballast asset in the portfolio should always be there, but reducing the scale as it grows, and you’re capturing the leverage and purchasing power from the diminishment in shares and the inflation, if you will, of the value of the metal. So your purchasing power is increasing and you’re doing this all on an incremental basis. So in each case the reduction is from a remaining balance.
And this is essentially dollar cost averaging out of precious metals and dollar cost averaging into equities. And I think, again, like the first question relating to the gold/silver ratio, perfect is the enemy of the good. And so you’re positioning for the next decade of growth, not the next quarter. Coming out of a bear market in equities, I think where we can add value as a team is that there are sector preferences. There are places that in the early stages of an equity bull market you want to be positioned, not just broadly in the S&P or Dow, and that’s value that we can add. If you’re interested in partnering with our asset management team, it’s a good time to create those relationships.
Kevin: Well, and this is not a computer algorithm where you can just say, okay, at this number you do this much. A lot of times there are other factors in the market. That’s where partnering with the team comes in very handy.
David: Yeah. I think you could put it into an algorithm if you wanted to trade indices, but to the degree that you want finer differentiation in quality—and I’m talking about management teams and the quality of assets and prospective growth—there, I think, the marriage of our top-down macro views with bottom-up fundamentals is something that the disciplines that flow through our team to market allocations, huge value-add.
Kevin: Right. A lot of other things to look at. The next question is from Bill. “With Silver now being designated as ‘strategic,’ do you see any scenario where individuals selling coins and bars would not incur a tax associated with a collectible item?” What’s the thought on that?
David: I would say it’s unlikely.
Kevin: Right.
David: Mainly because the IRS is not keen on shrinking your tax liability or shrinking their revenue stream. So it may be strategic, that’s helpful in terms of its acquisition. It’s also, I think, predictive in terms of where you’ll see government funds flow and permitting process eased, but on the tax side, I think it’s unlikely to see any advantage pass through to the metals markets.
Kevin: As I looked through these questions, Dave, you and I talked about this, but it was interesting to see how many questions involved either taxation or some sort of government intrusion. So going on to the next question from Thomas, “if I take possession of either gold or silver from Vaulted via silver or gold eagles or gold buffaloes and sell them, do I have to pay taxes? Is this similar to holding an IRA account?” Is it similar to an IRA? It’s really not, is it?
David: No. And this is what we call a de-allocation from what you have allocated under the prepaid forward contract. So to clarify, the advantage of a prepaid forward contract is that you can settle the contract in the format that you prefer, like eagles or buffaloes. You retain your original basis. And so once the contract has been delivered, the taxes owed are standard at the 28% upon future liquidation. It doesn’t happen at that point, but upon some future liquidation, it’s the original basis on the ounces, which were, again, allocated to kilo bars or 1,000 ounce silver. You take delivery or de-allocate to a particular product, you retain the original basis, and going forward, it’s the standard 28%.
Kevin: And so when it’s sold, yes, it is taxable.
David: Yeah. The conversion from kilo bar ounces or 1,000 ounce bars, again, that’s what’s allocated to back the contract. When you do that to particular ounces, that is not a 1099 event, but is taxable in the sense that you change from the prepaid forward contract structure to standard delivered metals. And selling those ounces at a later date, of course, as I mentioned before, would be taxable, unlike an IRA account, which eliminates capital gains taxes. And of course, the exception there, and there is an exception with IRAs, is if you take physical delivery of metals out of an IRA in the form of a required minimum distribution, or if you take a tax distribution, those are different forms of taxable events. Having physical metals out of an IRA, you’ve removed yourself from the umbrella of tax deferral, and then any liquidations from underneath that umbrella would be taxable at the standard 20—
Kevin: So which we’re talking— Yeah, when someone takes in kind distributions, if they say, “send me my eagles,” and they later sell those at a higher price, it’s a new taxable event.
David: Yeah. And any distribution, whether in-kind or a cash distribution is added to your adjusted gross income in the year that you receive the distribution. Of course, that’s an income issue, not a cap gains issue.
Kevin: Okay.
David: And I mean, just to clarify, I’m not a CPA. I don’t give tax advice. These are guidelines for you to have a framework of thinking about things, but if you ever have detailed questions, always pursue that with your CPA and get clarification because you may have special circumstances.
Kevin: Next question’s from Andrew. He wants us to take a time machine back. He says, “It’s New Year’s Eve 2023 and gold is just over $2,000. You look into your crystal ball and see that in less than two years, gold has blown past 4,000. What do you think has happened for this to be true? And thank you for putting me back on the gold standard, Dave.” That’s what he said.
David: Yeah. I think what we would’ve anticipated, what would’ve had to have happened to go from 2,000 to 4,000, continued central bank purchases, which starts to put pressure on available supply. And then I think, beyond that, some sort of catalyst for investors to look differently at the financial landscape, and that could be a variety of things. Could that be pressure on equities? Could that be pressure in the fixed income markets? I think the reality has been, we could have anticipated this, and it has played out this way, questioning of US debt capacity.
As Treasury liabilities are rolled over, are we dealing with increasingly higher interest rates? And this is particularly relevant to a reappraisal of the Treasury market, income market. Rolling the clock back to New Year’s Eve 2023, we might have asked, “how goes the fight with inflation?” because, in addition to debt capacity concerns, inflationary pressure in the interest rates market begins a sort of non-virtuous cycle of second guessing the role of Treasuries as a safe haven. And any of those things can be, and, in fact, I think have become the catalyst driving investor demand towards gold and silver.
So as far as comment about being on the gold standard, this is one of the magic elements of private ownership. Even though we won’t have a policy shift back in the direction of a gold standard, saving in ounces, being on your own gold standard, gives you the comfort of the Federal Reserve not managing your savings into the ground. And of course, it allows you to spend those ounces as a more reliable expression of currency as and when needed.
Kevin: Yeah. I remember the day when it hit me that I could put myself on a gold standard. I was working here, and it was like, “Wait a second, we’re not just buying gold. We’re actually putting ourselves on a gold standard.” And it’s a great feeling when your government won’t do that for you.
David: There’s an old Wall Street guy, Lewis Lehrman, who wrote a book on getting us back to the gold standard. And it’s fascinating that you could buy it at Amazon.
Kevin: You’ve given hundreds of copies of this away.
David: Yeah, because actually, the process of going back to the gold standard is fairly straightforward. It’s not a complicated thing. When I say earlier that it’s unlikely to happen, and thus it’s left to us to make that choice individually for our own families. It’s because of the power of the purse. And I don’t think that Congress wants to relent. They’d like to maintain the power of the purse.
Kevin: They don’t want the discipline.
David: You can spend anything you want. You can expand credit as much as you want, as long as your currency is fiat, as long as your currency is unanchored to gold. So the gold standard implies a certain discipline that is reprehensible to the powers that be.
Kevin: Yeah. Yeah. Definitely put yourself on a gold standard. Our next question is from Dale. He says, “Thank you for the information you’ve provided. What’s your opinion and thoughts on David Rogers’ book, The Great Taking?”
David: I’ve read it and thought a lot about it. I think there are some significant flaws in his assumptions, and a part of it relates to the way power operates and a part of it is relating to how money and power commingle. Global insiders prefer high valuation metrics on assets they own, which requires a normal and healthy functioning market. And what David Webb is talking about is basically a market that goes away and the elites control 100% of assets.
For Webb to be right, the global elite would need to shift their thinking from pragmatic asset price maximization to monopoly benefits. With monopoly benefits comes no liquidity and no marking assets to higher market values based on multiple expansion. So there’s a built-in naivete into his argument. Multiple expansion is that market dynamic where you might have a company with $10 billion in assets that can carry a market value at either $10 billion or at 250 billion. And that multiple expansion is very attractive from a balance sheet standpoint, from a net worth standpoint.
I think Tesla is a great case in point. It sits today at a price/earnings multiple of 298. It’s roughly 20 times book value. And under the great taking scenario, Tesla might trade at a PE of 20 instead of 298, or maybe even less than that. And you’re talking about a share price of $32.80 versus the current $487 per share. So what is the difference to someone with power and influence if they’ve got a company that has a market cap of $1.6 trillion or a fraction of that? No one is that stupid, even if they have a lust for power and control.
Webb’s suppositions are flawed. Sure, there are stranded assets. I mean, if you look at different places around the world, you can see where you’ve got exactly what he describes, where the elite control everything. Stranded assets in a place like Russia, where oligarchs are worth billions of dollars, and somewhere between the bureaucratic state and the oligarchy, there’s a lot of money, there’s a lot of power still in play. But ask any of those oligarchs if they would prefer to have non-stranded assets trading at many multiples of their current value. And so there is a massive difference between having a net worth of 2 billion and 20 billion or 200 billion, and a freely traded market allows far more instances of the latter. So the global elites are not stupid. I think Webb, if not stupid, is at least naive.
Kevin: Right. Well, I mean, these guys would rather have the balloon inflated, even if they own the balloon.
David: Or a small fraction of the balloon, because the value of a small fraction of the balloon at inflated prices is much greater than a deflated balloon.
Kevin: Yeah. Yeah.
David: That issue of liquidity, what is it worth if you can’t do anything with it?
Kevin: Yeah.
David: A normal, healthy, functioning market is to the advantage of everyone.
Kevin: Including the elites.
David: Including the elites.
Kevin: Yeah. Yeah. Our next question, Tyler. “Hello. I’ve been finding the podcast truly informative. I agree with almost everything you guys say with exception to bitcoin.”
David: But I note there’s no question on bitcoin here.
Kevin: Yeah, I see that. He says, “Why own anything as a store of value if it’s not going to go up in relation to fiat? Anyway, thank you guys for putting out such great information and I respect your guys’ opinion. I’m a big fan. I have so many questions, but if you’d like to answer any, I’d be grateful. How much silver and gold did a Roman citizen have to be considered wealthy?” That’s an interesting question, Dave. “How much gold and silver would you guys recommend a family have to ease the burden of a fiat collapse?”
David: A middle class Roman family, so let’s say they’re in the top 10%, would have measured reserves at between 800 and 3,200 ounces of silver. And I did the math to convert from sesterces and looked at both the gold and silver coins at the time. So between 800 and 3,200 ounces of silver would put you in that middle class or top 10%. Between 30 and 130 ounces of gold. Bear in mind that one in three Romans was a slave, so we weren’t talking about a huge middle class to begin with. Really wasn’t much of a middle class. And frankly, most wealth was not in physical metals. Romans innovated credit, and they preferred to leverage the property and chattel human resources quite literally. That’s what they wanted to control to create their incomes.
They were essentially shareholders in an expanding empire as citizens with a carried interest in the lands that were being conquered. So the land was important, the productive capacity of the land was important, and leverage. They experimented with credit in ways that had never been experimented with before. And some of the most fascinating episodes of credit crises really were—
Kevin: Were in Rome.
David: —were in Rome. Exactly. So reserves were secondary to being totally leveraged to the expansion of the empire. Credit cycle dynamics did on occasion underscore the importance of owning metals. Tiberius delivered a sort of 1929-style liquidity crisis, and that did send wealthy Romans scrambling for gold and silver. So back to the question, we talked about the 10%. The 1% would have had reserves and precious metals of between 8,000 and 32,000 ounces of silver or between 300 and 1,300 ounces of gold.
Kevin: It’s interesting, timing wise, that you brought up Tiberius because Tiberius is the Caesar with Jesus Christ. And so that was an interesting answer, Dave. I hadn’t really thought about how many ounces it took to be in that upper crust in Rome, but all right, now, for the second part of the question, how about today?
David: To ease the burden of a fiat collapse, I think a family should have three years’ worth of living expenses in physical metals. In the context of a fiat collapse, the value of ounces would likely stretch beyond those three years as the value of the metals were appreciating in that context.
For example, if you live on $70,000 a year, $210,000 in various ounces, gold and silver combined, you’ve bought yourself sufficient time to allow policy missteps to play out, and for a solutions mindset to reemerge. Most fiat collapses become acute and are resolved in a two to four year time frame. So do you need 100% of your assets in metals? Absolutely not. But I think, in the context of that question, helping your family ease the burden of a fiat collapse, I think three years worth of living expenses in that form is adequate.
So again, thinking through a fiat collapse, I think the ability to trade is essential if you were in the worst form of a fiat collapse, and I think you kind of reorient your thinking towards Maslow’s hierarchy of needs. And some of those top tier things just are irrelevant in that context. People aren’t afforded the luxury of thinking about self-actualization or self-esteem, which are things that you can prioritize as you move up the hierarchy.
Kevin: They’re trying to survive. Yeah.
David: Exactly. Historical currency collapses have brought a laser focus to more fundamental elements in Maslow’s hierarchy. Safety, basic physiological essentials—food, shelter, clothing, water—something that extends a portfolio and meets more basic needs beyond the metals. I mean, not everyone has the luxury of doing this, but if you have space for chickens, cows, access to clean water, a root cellar with a good bit of whiskey and a good bit of lead. I know it sounds crazy, but I think worst case scenario analysis, it goes beyond silver eagles exchanged for groceries.
By no means am I a survivalist, but I was raised to think like an Eagle Scout and to solve my own problems independent of the system. As we look at platinum, silver, and gold trade higher, I go back to a time frame 30 years ago, 35 years ago, when we were working with multiple currency— It was a really fabulous mutual fund product. And the manager of that product, Klaus Buscher, lived through the fiat collapse in Germany. And the story that he told of his company, I think it was vodka, not whiskey.
Kevin: It was vodka. Yeah, he told me that story on the 42nd floor of a New York building. He said, “We had vodka as our currency unit.”
David: This is a sophisticated fixed income and currency trader talking anecdotally about how his family survived a fiat currency collapse. And it was trading for essential goods with a different form of liquid product, probably Russian vodka.
Kevin: And he said, “We didn’t drink it.”
David: No.
Kevin: We traded it.
David: That’s right.
Kevin: We traded it. Second part of Tyler’s question. He said, “I bought silver with hopes of playing the gold/silver ratio when it gets lower. Now, I’m wondering what the benefits are of converting to gold besides weight, space, and volatility. At what ratio would you guys begin converting the metals?” I think you’ve started to answer that earlier, Dave. “I know a couple of episodes ago, you said to start around 60:1, but this run does feel different than bull markets of the past, or does it? How long do you think the gold/silver ratio will go this time? What ratio of gold to silver do you recommend for your clients?
“And what does a global monetary reset look like to you guys? And thank you for your consideration.”
David: Great question. So, the first question, the ratio is about moving from a premium asset to a discounted asset. It’s the full cycle played, and you get to do it over and over again. And that nets the greatest benefit. You double your ounces in a full cycle, and then do it again. And you’ve doubled what has already doubled. So, the compelling aspect here is, I view precious metals as an inter-generational asset, and there’s a strategy that compounds ounces. It’s not unreasonable to spread that project out over 50 years and to do the full cycle four or five times. So, 100 ounces to start with ultimately becoming 1600 ounces or even 3,200 ounces.
And we go back to that question about Rome and the difference between the 10% and the 1%. And we’re talking about 1,300 ounces being at the upper end of being in the 1%. Using the gold/silver ratio and stretching over one or two generations, you can begin to see the compound effects in a very dramatic way. That’s a lot of time and a lot of patience. What would your grandkids think about precious metals as a ballast portfolio asset? Pays no dividends, but properly positioned over a half century could see 16 to 32 times growth in ounces.
Kevin: That’s astounding.
David: So, you begin the process when you’ve passed a 30- to 50-point swing. You don’t do it all at once. You may only see that 30- to 50-point swing, and you may see even more, but you only know that in retrospect, as we said before. The perfect number is only known in retrospect. If you bought with the gold/silver ratio at 100:1, you have a small trade at 70. That’s a 30-point swing. A more substantial trade at 50:1. And if you’re fortunate enough to see a 70-point swing, you’re taking the average of the ratio over time to compound ounces. When I do my own spreadsheets on these kinds of things, a 40-point swing is my target because there are many more instances of that happening, and you can certainly back-test that strategy if you care to. It would not surprise me to see 50, 40, even 30.
Our recent guest Michael Oliver suggests an even lower number. Eric Sprott anticipates a return to 15:1. But as a trader, I want to incrementally move and make sure I’ve captured an acceptable gain in ounces while still leaving open the opportunity to improve my average ounce gain in the event that we get that outlier, and maybe we do see 15:1. I just wouldn’t hold my breath for it.
Kevin: Well, before we go on to the global monetary reset part of the question, just a reminder to the listener, when you are doing gold to silver or silver to gold ratio trades, you’re never moving actually into fiat currency. And I think that’s an important thing to remember. You’re moving from something solid to something solid. That’s a lot safer than saying, “All right, I’m going to take my profits into cash.”
David: Yeah, there’s a variety of ways to trade assets. And in real estate, you’ve got the benefit of the 1031 exchange, and to be able to trade properties and trade up, or trade around is a possibility. In equities, there’s ways to arbitrage value, and this is the equivalent of a value arbitrage in the physical metals. So, you don’t have to move to cash. That’s a different strategy altogether. If you’re playing the market and you’re in and you’re out, this is a way of allocating to physical metals and having that strategy in play on an enduring basis. So, his question—Tyler’s question—on the global monetary reset. I think we’re in the middle of a global monetary reset.
The move away from invoice settlement in dollars and reserving by central banks in gold ounces rather than Treasuries is a part of a reorientation away from the post-Bretton Woods system in which the dollar was privileged and has held monopoly status. You have the emerging markets, you have the BRICS, they’re essentially done. The evolution is the reset.
Kevin: Right. Yeah. The gold recycling instead of the dollar recycling, right? All right. Our next question from Terry, “Kevin, and David, just to confirm, I assume the sale of my precious metals is a taxable event, correct? If so, if I leave metals to my heirs, is there a step-up in basis for them, just as with real estate? Thanks. Appreciate you guys.”
David: That’s correct. It’s a taxable event unless you have metals in an IRA. There are also some innovative ways to gift ounces to a DAF, which is short for donor advised fund. We’ll be writing about that. I’ll be writing about that in 2026, and that assumes that you’re philanthropically minded. Look for a series of white papers from me on that topic this next year. But as it relates to heirs, not necessarily philanthropy and estate management towards that end, but as it relates to heirs, upon your demise, there is a step-up in basis. So, on your date of death, their cost basis is reestablished at the prevailing market price. Tragically, I see clients in their ’80s and ’90s coming to us to sell ounces.
In their minds, what they’re trying to do is simplify their estates. They desire to gift cash and reduce the complexity of a tangible gift, where it’s apparent that their heirs really don’t understand the nature or the benefits of owning precious metals. What they’re in essence doing is diminishing the value of the gift to heirs by 28%. If they were patient and allowed it to pass on and receive the step-up, the estate would be enhanced by that 28%.
So, I think better a lengthy conversation and education as to the value of tangible assets like gold, and let the heirs sell and move on if they wish. There’s currently no death tax until your estate exceeds 15 million—this is for 2026—15 million per person, so 30 million in aggregate.
So, why would you incur an unnecessary capital gains tax when, according to the current tax code, you get the step-up in basis. Of course, this assumes that the step-up in basis remains a fixture in the tax code.
Kevin: Well, I think you’d point out something very, very important that older people a lot of times think that the heirs are not going to understand having precious metals passed to them. One of the things we encourage here, Dave, is family meetings with our clients. Get those kids and grandkids on a line with one of the advisors here, and have that conversation because it’s a lot easier than they think.
David: Yeah. I do a lot of conference calls where we’ve got multiple generations, two, three generations on the line. And if you’d like to set that up in 2026, I’d be happy to do that. And it’s some version of financial coaching, and just an exploration of why you own different assets. We often talk about the perspective triangle and the different mandates that you give to assets until people understand the role of liquidity, the role of insurance, the role of growth and income in a complementary fashion. I think it’s easy to discount the merit of having a precious metals portfolio. So, an heir may look at it and be like, “I’d rather be invested in stocks.”
Well, that’s fine. You can have that allocation, but that’s only one mandate within a broader picture of what you’re asking your assets to do for you.
Kevin: Yeah. No, that’s a great point. And a lot of times our clients will give a gift at Christmastime or a birthday or what have you. I always tell my clients, don’t ever give a gift of precious metals without giving them a story. Teach them why it’s important, what’s happened to money. Yeah, so please give us a call.
Next question, from Burt. “I’ve been periodically buying graded mint state pre-1933 gold Double Eagles for about 20 years. On a wholesale basis based on the grade, these coins have historically sold at varying premiums over spot price of an ounce of gold. Recently, the wholesale cost of these graded mint state coins has been about spot price and with virtually no premium.
What are your thoughts on the trend in premiums for graded mint state gold Double Eagles? I’m a longtime listener to your Weekly Commentary podcast, and I appreciate the time and effort you put in, sharing information with your audience.”
So let’s talk premiums, Dave, because this company has been built on that for 53 years.
David: Yeah. And I think in a portfolio mix, there’s a place for those kinds of coins. Again, like choosing a particular theme, and only that theme, doesn’t really reflect an adequately diversified portfolio. You should have gold, you should have silver, you should have platinum and palladium. And then how you break up your gold position and your silver position, there’s ways, sort of subsets, if you’re playing the value game.
So, you’re right, you’ve got limited supply of these historically intriguing coins, and because of that limited supply, that’s led to premiums well above their raw gold content. The premiums are driven by a supply and demand imbalance. And so demand, when it outstrips supply, you see the premiums rise. And when demand dissipates, so do the premiums.
So currently the flows of capital into the gold market have not been in what I refer to as the OTC market, the over the counter market, physically deliverable gold. A lot of the demand has been from central banks, and that comes in the form of 400-ounce good delivery bars, or if you’re in Asia, then it’s kilo gold bars in particular.
Investors unfamiliar with the merits of owning and controlling an off-grid physical gold position have begun to migrate towards the metals, but they’re doing it first in ETFs, which allow you to secure ounces in the form of publicly traded shares. There’s ounces behind the shares. Retail investors have been largely absent from the bullish trend if you’re looking at the price moves from 2,000 to 4,400, and so you have the available supply of these US $20 gold pieces and inadequate demand to pressure the premiums higher. Assuming they enter the market at some point, premiums will return. And that is another way, like the gold-silver ratio, to arbitrage value and to compound ounces.
The trades do not happen as frequently as other products. For instance, we do the same with junk silver coins. This is your pre-1965 dimes, quarters and 50 cent pieces. We’ll see those trades happen probably every two years, every two to three years. The frequency of the premium trends with US $20 gold pieces are, like the gold/silver ratio, stretched more like to five and 10 years. So the periodicity is much more stretched. I mean, in essence, you buy when premiums are low, you sell when premiums are high, and you recycle the extra dollars into free ounces. So a part of my metals portfolio is geared for that.
And again, it’s just healthy to have a mix of things. And not everything is traded at once, there’s different circumstances that drive different parts of the market. Platinum moves, and gold and silver are doing nothing. Palladium drops, and gold and silver are going to the moon. So this diversification, it’s not like everything is moving all at once. Maybe 2025 is an exception. We’ve got everything moving. But very interestingly, not premiums, and not in the US, which tells us a lot about the traffic pattern. Tells us a lot about the kind of demand and the kind of person basically playing the market with a different set of concerns in mind.
Back to the $20 gold pieces. The older Saint-Gaudens and $20 Liberties, this was during the 1920s and ’30s, they had the equivalent value as a $20 bill and they were used as currency. They were currency prior to the 1933 confiscation. Many of those ounces were shipped to Europe, which today is one of our best sources for them.
Kevin: Yep. Drew goes back to Europe often to buy $20 gold pieces.
David: Yep.
Kevin: Yeah.
David: One more comment on premiums. They tend to compress in a rising gold market. And when prices stabilize, it allows for the premiums to reset to higher levels. But rarely do premiums keep pace in a rapidly rising market. Buyers show up once prices have stabilized, and the wholesale market is allowed to recalibrate.
And a key function there is within the wholesale market. Premiums can’t be hedged. This is really critical. The premium portion cannot be hedged like a generic ounce of gold can be hedged. So in a rapidly rising price environment, the wholesale bids on pre-1933 coins, they soften as market makers are reluctant to pay premiums, which in a volatile market may leave them holding the bag. So, as an example, take $4,400 an ounce. You sell me an ounce, I buy it from you and I immediately hedge it. So I take no market risk with my inventory. I’m not playing the market with the inventory.
Kevin: Right.
David: What about a $4,800 coin? All I can hedge is $4,400. So every ounce I buy back at $4,800 has a $400 risk in my inventory. If the market declines, I can’t hedge nearly 10% of that inventory. Neither can a wholesale market maker. So to restate, in a volatile market, defined by larger swings up, and occasionally downswings, premiums are compressed as an expression of inventory risk mitigation. Bids soften, and then when demand reemerges in that price stabilization mode, a plateau or any form of stabilization, then wholesale bids strengthen broadly.
Kevin: Right. So we really do have an opportunity right now because the premiums are nil.
David: Yeah. With little to no premiums on those coins today, they are one of the exceptional values to consider. My personal favorites, the Mint State ’63 and ’64 Liberties. The population reports are far smaller for Liberties than for Saints. And so the premium performance is thereby magnified. When I talk about population reports, I’m talking about the original mintages of the coins, and then the coins that have endured in higher condition, in better condition. Because, I mean, if something was circulating in 1880, 1890, 1910, it was in circulation for a long time versus the Saint-Gaudens, which were only issued starting 1908, and went through 1932. You won’t find 1933s. If you have one, don’t tell anybody about it.
Kevin: Yeah. It’s worth millions or jail time, depending on how you trade it.
David: Yeah. So again, my personal favorites, the ’63 and ’64 Libs, they’re kind of the sweet spot in terms of populations and leverage to a move in that premium.
Kevin: Didn’t you sell bars and move into quite a bit of that?
David: Yeah. I sold bars a few years back to buy those coins. Paid far higher premiums than are currently in the market. But the goal with those ounces was and is to double the number of bars that I have. And that’ll happen in time.
Kevin: Right. That’s that premium play. All right. Next question from Andrew. “Hi, I’m just wondering how best to navigate the metals market. Is the time to buy gold and silver still now, and what are the strategies when to offload it? Should we be keeping it all long term or using silver price rises to buy more gold or just sell everything off? Cheers and Merry Christmas.”
David: Yeah, I’ve already addressed some of this, but if I were starting out today, I think a mix between the yellow metal and the white metal would probably be 40% gold, 10% platinum, 50% silver. And again, the gold/silver ratio favors silver, and platinum’s a different animal. Platinum’s trading at a discount to gold and it argues for it being in the mix as well. The reason it ends up getting a smaller percentage, the platinum group metals, is because they are purely industrial metals, and they get a much smaller allocation to adjust for economic sensitivity.
I would never completely offload my metals position, in answer to the question. I think trading ratios and premiums allows me to compound ounces indefinitely regardless of a bull or bear market dynamic. But there will come a time when a lateral move from some ounces into equities happens, so I would just stay tuned.
Kevin: Well, Dave, that’ll do it for program number one on our question and answers. Be sure to tune in next week for part two.
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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.
