Podcast: Play in new window
- J.P. Morgan, Goldman Sachs Call For Gold To Be Between $5400-$6300 By Year End
- Inflation (Not-Transitory) Now Above Target For More Than 5 Years
- Bank Of America Predicts Silver/Gold Ratio Possibly In The 30s
“So reasonably expect 4.1% CPI inflation. We’re at 3.8 now. The next print, don’t be surprised if it’s moving in the direction of 4. Expect another bump in May. And if we continue to drain oil reserves in the context of 20% of global supplies remaining offline, you could see significantly higher oil prices. If that’s in the cards: higher oil, higher CPI; higher CPI, higher interest rates.” —David McAlvany
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Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick along with David McAlvany.
David, we just came out of our meeting and you didn’t jump right into interest rates, you jumped right into gold, and then you told us why we went right back into interest rates.
David: Yeah. I mean, I think to see what is happening in the bond market today is to see the next chapter, so to say, of the gold market. And if you wanted to know the strongest support for gold going forward, it is that we have a sovereign debt crisis, and it’s not just in the United States, but it’s across the G7.
Kevin: It’s showing up globally.
David: It is. And so I look at the gold market as an expression of an opt-out for a system that’s broken, and it’s an opt-out that we’re seeing exercised by the central bank community and by investors as well. But I think that crowd only grows with time as the problem becomes more obvious. And I think you’re going to have to see not only inflation rates but interest rates as well at levels that are surprising and scary for the generalist investor to really care and to take action. But I think for anyone with some foresight, the option is now and the opportunity is now.
Kevin: US debt alone, a third of it has to be refinanced, and interest rates have to be higher at that refinancing. So let’s talk about this.
David: Yeah. Hyperbole— I think there’s an opportunity at times, and you read newsletter writers and you see news headlines and everything is terrible always. Hyperbole is never, ever helpful, and those that use it are always completely wrong. And of course that is absurd.
But hyperbole, better put, is rarely helpful whether it’s used in relationships or in market analysis, and yet it tends to be what moves the needle for people feeling enough to take action. And I think one of the objectives that I have with the Commentary is that it never veers towards hyperbole. If we go there, I hope that in the comments people will hold our feet to the fire and say, come on, maintain nuance. Nuance is not high drama, but it is important for understanding what’s happening in the world around us.
Kevin: Yes, but in a way, I wish we had a lighting system that—let’s don’t use hyperbole, but we need to know when we’re on a yellow light and when we’re on a red light. You know what I mean? And in a way, the volatility in the bond market right now, without using hyperbole, is moving from yellow to red, isn’t it?
David: Yeah. So before we discuss the bond market volatility—and all kidding aside—if there is a tone of concern in our comments today regarding bonds, the market is not panicked, but it’s lodging the early stages of protest. And like any protest, it can be a peaceful protest, and at the extremes it can even become violent.
Kevin: Right. But you have floors and ceilings, and right now ceilings are being broken, right?
David: Yeah. Today’s version of a bond market protest is peaceful so far, and it’s isolated to sovereign debt. So global bond yields are rising. That is a fact. US yields have broken a ceiling. The 30-year Treasury bond at 5.15 is in new territory. The 10-year Treasury at 4.62 has room to move higher before it takes out the 2023 highs, which were 4.92. The 2-year actually passed 5.1% back in 2023. Today it’s just over 4%.
At least in the US markets, the interesting feature is that the entire yield curve—the entire yield curve from the Fed funds rate out to the 30-year—the entire yield curve is above our average interest cost. So the average interest expense is 3.37, suggesting that interest costs have only one direction to head.
Kevin: And that’s where refinancing a third of our debt in one year comes into focus.
David: That point is incredibly important. Refinancing over 33% of all US Treasury debt this year with an elevated yield curve above the average interest cost compounds fiscal pressure and certainly tempts the bond crowd to move from the peaceful sit-in into a violent protest, which has not yet occurred.
Kevin: But people still don’t show concern necessarily on the corporate side of things. I mean, Treasuries right now, you’re seeing those going up, but the concern in corporates, it’s compressed right now.
David: That’s right. Yeah. So staying in the US bond market, we have seen a continuation of spread compression in high yield and investment grade corporate credit, investors are still yield hungry. And more than that, I think they’re more yield hungry than they are risk averse within the fixed income allocations that they’re making.
Kevin: So they’re not running for safety right now. They’re running for returns still.
David: That’s right. A classic sign of stress in the bond market is for now absent, and that would be a widening of credit spreads. The primary concerns we see are swirling around countries with compromised fiscal positions and inflation problems, and it’s a long list. So where the rubber meets the road is with our interest expense. We expect it to go higher because all of your refinancing options are now at numbers that are above the average interest expense at 3.37. The monthly interest expense over the last several months, $88 billion running over a trillion annualized.
Kevin: And you’re only talking interest right now.
David: That’s correct. Bloomberg on May 12th reported that the Treasury paid 112 billion in interest for the month of April, which is a $1.344 trillion annualized rate. Now, of course, not all months are that high, but payments are going to vary, and maybe that was the high watermark at 112. We’ll see.
Speaking of payments, we’ve got 35.5 billion in tariff refunds that are going back to importers following the Supreme Court’s decision to reverse the White House policy on tariffs. And that is the amount processed thus far through the government’s online portal. So we’re talking about fiscal stress. We’re talking about not enough income to meet expenses. We’re talking about a $1.9 trillion budget deficit estimated by the CBO, and that’s before we got into the war in Iran. It’s also before we consider the adjustments to interest expense as interest rates creep higher, which is not what the market wanted. It’s not what the bond market was expecting at the beginning of the year.
Kevin: Well, and Trump was expecting to have those tariff profits come in and pay that off. I mean, that was a big part of selling greater debt.
David: At least offset a part of the growing fiscal deficit. So if we take a wider global lens and look at other countries, not just the US, the UK gilt market is also under pressure. You’ve got the 30-year gilts priced to yield 5.75% and that’s off of last week’s peak at 5.87. The 10-year UK Treasury bond, 5.17. It’s at levels that we haven’t seen since 2008. And in the UK, the journey from 85% debt-to-GDP, now to 150% debt-to-GDP, we’ve covered that ground from 2019 to the present.
Kevin: Wow.
David: So from 85 to 150.
Kevin: Almost doubled. Yeah.
David: Yeah. So Japanese government debt also an issue. Japanese government bonds similarly under pressure. 30-year JGBs, Japanese government bonds, are trading at 4.16. Never been higher.
Kevin: So it’s highest ever.
David: A year ago, 3% was the ceiling and is now seemingly a new floor. 10-year JGBs at 2.8% are at the highs going back to 1997. Last week’s rise in the Japanese government bond market was the most we’ve seen in any week for over 23 years.
Kevin: Well, and you brought up debt-to-GDP with the UK. What is it with Japan?
David: They run over 200%. Some analysts calculate it closer to 250%. So call it 210 to 230 conservatively, and a more aggressive approach might pencil it out at 250.
They may be dealing with smaller interest rates than we have or the UK has, but it’s on a larger base of debt, which is highly consequential for finance costs. So with inflation rising in Japan, the discussions around a rate increase are now happening on a daily basis, and a move higher, if you’re listening to their leadership, is imminent.
Kevin: We’ve talked over the last few years how strange it is that you’ve got countries over in Europe that actually pay less interest than US Treasuries, which are supposed to be the safety net, but like German bonds, we even talked about Greece. Remember when Greece was in the headlines back in-
David: Sure.
Kevin: —2013, 2012? Their rates are lower, but they’re rising, aren’t they?
David: Yeah. And I think it’s important to remember that it was only a few years ago that the 10-year US Treasury was the reference point for what was called the risk-free rate. Now the 10-year Treasury is higher than the French, higher than the Greek, higher than the Italian, higher than the German.
Kevin: That’s amazing.
David: It is not the risk-free rate anymore. So across Europe, you’ve got yields also testing previous ceilings, and Germany 3.17% for 10-year paper, and that’s the high going back to 2011. French 10-year notes, they call them OATs, they’re at 3.86—last week just a basis point away from the highs going back to 2008. Italy, 3.95. Greece, 3.89.
And note that the higher borrowing costs in the UK and the US and with the Japanese only slightly lower, the concern is fiscal. That’s the concern. Inflation is an acute problem. It’s an acute problem globally, but it’s reflecting itself in bond yields and in places that lack the resolve to cut spending or drive tax revenues higher, a combination. Both of those are politically unpalatable. And of course, so if you have a fiscal issue, too much debt to begin with, the inflation problem’s a bigger deal. It’s a much bigger deal.
Kevin: Well, one of the things we can watch, Dave, is what’s coming—the implied rate, basically. What are people in the futures markets saying about the interest rate right now?
David: And that has shifted dramatically since the beginning of the year. In the US, the implied rates for year end 2026 are now higher, whereas the beginning of the year, we expected them to be considerably lower. So 50% probability of a 25 basis point increase for the fed funds rate, that’s priced into the markets today. If you look at the swaps market, the Financial Times suggests a 75% probability of a rate increase this year. So again, in January the markets were pricing in a minimum of two 25-basis-point cuts. Now it’s 25 basis points the other direction.
Kevin: That’s a big shift, but we’ve seen so much volatility. How come the credit default swaps? I mean, the volatility index, nothing’s really signaling concern right now in the market other than the volatility itself. I mean, it’s been hard to predict, but the metrics that you look at really don’t show that people are running away.
David: Yeah. When we’ve talked about liquidity and there being an abundance of liquidity in the financial markets, we’ve described it in past programs as like a game of musical chairs. Music’s playing, there is no issue. As long as there’s liquidity in the market, nobody’s particularly concerned and nobody’s grasping for or trying to edge someone out for their seat. Right?
Rates rose aggressively last week. We had that in the sovereign debt market. But we had high-yield CDS—that’s credit default swaps—they dropped. We had high yield spreads to Treasuries that didn’t budge. 10 basis points below their pre-war late February levels. That’s where high yield spreads are. You mentioned the VIX, implied volatility in equities, somewhat elevated at 18, but well below the March 27th highs of 31.
Kevin: And this is holding steady because liquidity seems to be prevalent.
David: Yeah. What I’m saying here is that systemic risk signals are not going crazy. The concerns are concentrated in sovereign paper. Corporate borrowers are finding easy access to funding, and pricing in corporate bonds does not yet suggest that the music is stopping. So liquidity is not drying up. Financial markets have plenty of liquidity. You think of tech companies. Tech companies have issued more than $300 billion in debt to fund their AI spending this year. And it’s led by Google and Alphabet with $60 billion in debt offerings year to date.
Kevin: Wow.
David: 60 billion.
Kevin: So there is no lack of money coming into that.
David: What they issued in debt on their last round was more than they had in all debt for over a 25 year period. So they are ramping up, and the markets are just saying, “Bring it. We’re happy to have it—
Kevin: As long as AI is stamped on there. Yeah.
David: So one of the few financial market signals that risk aversion is present is the disconnect between bank stocks and the broader markets. Bank stocks are unchanged year to date. While the NASDAQ is 15% higher, semiconductors are 60% higher.
Kevin: So they’re being left behind.
David: Well, banks usually participate in sustainable bull trends. And you will see the benefits of a healthy economy, a healthy lending environment, you will see them flow into commercial banks. If they’re not participating, that does suggest that something’s not quite right.
So again, we’ve got sovereign debt which is saying something’s not quite right. Well, that’s a fiscal issue. You’ve got the commercial banks, which are really the only other signal at this point, which suggests that something’s not quite right. Spreads suggest we’re fine. Credit default swaps suggest we’re fine. VIX, minorly elevated, but not majorly concerning at this point.
Kevin: Yeah, but what about private credit? Because that’s what’s not being monitored. A lot of times you can’t see it.
David: That’s another signal. Notably, credit quality deterioration, that’s what you have in private credit. It is siloed, and so maybe that’s why it’s somewhat ignored. But you do have assets that are being marked down in some cases to below 50%. And default rates are increasing to between eight and 10% of holdings within private credit portfolios. But again, it’s siloed for now.
Commercial banks and insurance companies are exposed enough to private credit for it to matter. And I think that’s worth keeping in mind. Not only has the Financial Security Board in the UK, but the Federal Reserve here in the United States has done a number of studies in the last few weeks pinpointing this pressure within insurance and within commercial banks with exposure to private credit. Indirect lending, they wanted a piece of the action. And so they’ve made credit available even though they’re not directly lending to the enterprises that need the money within the private equity space.
Kevin: So it’s shadow.
David: Yeah. So bond market concerns spread beyond sovereign paper and the bond market protests. If they take on a more agitated character, then I think you see, even more than we have now, daily headlines with Aries and Golub and Apollo Global and KKR and Blue Owl. Today it’s insignificant percentages of gating and restrictions in terms of capital flowing back to investors—and yes, they’re writing down portfolios, but it’s single digits. Maybe it bumps into the 10% range. No one’s worried yet.
Kevin: Yet. Okay. So they’re not worried yet. But when you’ve got a sovereign debt crisis, when you’re talking about governments, that’s really, when I was talking about the lights, if you were to say it’s going from yellow to red, it’s in the sovereigns right now. It’s not in the corporates, but that could change quickly.
David: Yeah. And I think again we come back to this issue of liquidity. If there’s ample liquidity in the market system, people are still looking for opportunities to make money. It’s when liquidity starts to dry up that they reappraise the whole of the financial markets and you begin to see a more unified expression of concern.
So bond market stress currently is in the sovereign bond world. It’s in that domain. Notably, it’s global. Particularly notable, is the high debt-to-GDP countries. That’s important. The bond market protest is focused today in terms of currency volatility. You do see that as an expression where folks are dealing with inflation and significant impacts from an energy crisis.
Kevin: Well, so let’s talk about that because inflation was already in the system. You brought that up that in January we were already experiencing inflation issues before the energy crisis. But this energy crisis, Morgan Lewis in his latest Hard Asset Insights just talks about how closely we are getting to the bottom of the barrel and what that could do from an inflation standpoint. So how are the countries that are having to import oil doing?
David: Yeah. Bloomberg, May 14th, noted that if you have a look at a list of the worst performing currencies since the start of the US and Israeli war with Iran, a striking but unsurprising pattern emerges, they are almost all energy importers.
Kevin: You could see that.
David: So the biggest losers include the Egyptian pound, the Philippine peso, the South Korean won, and the Thai baht. And I would add to that list the yen and the Indian rupee. But with the yen, you’ve had massive weekly interventions in the tens of billions of dollars. So the yen has sort of stepped back from the ledge. The rupee, it’s sitting at all time lows relative to the US dollar. 96 and a half to one is the exchange rate.
Kevin: Okay. But what you’re saying now is it’s the energy crisis, not the economy, stupid, but it’s the energy crisis, stupid, going forward into sovereign debt.
David: Well, the energy crisis is driving sovereign bond stress, particularly for those running reckless fiscal regimes. And currency stress is showing up in countries with an overly dependent import structure where they have to bring in energy imports. They don’t have any independence there.
Kevin: And we’re not just talking oil. I mean, there are products that are made with oil that are probably becoming scarce or very expensive.
David: Yeah. The other knock-on effects that end up swirling back into the inflation picture, you’ve got construction projects being stalled, according to the Financial Times, you’re dealing with the lack of PVC. This is plastic pipes. What’s it made of? It’s an oil byproduct. Insulation, paint, these are all oil derived. You run into supply issues and you have to pause a project. That’s an issue. The construction industry contributes 13% to global GDP. You don’t want that disrupted for too long or you begin to see, again, kind of a knock-on effect. Inflation from oil is one thing. Lack of supply is another. The throughput into other products being limited, that has impacts into other economic spheres, in this case construction.
Kevin: And it’s all inflationary.
David: Yeah. I mean, Detroit is not construction. They expect a $5 billion hit to profitability from rising aluminum and from plastics and from paint costs. And when the Financial Times ran that, it was actually between five and six billion they expect in terms of a hit to profitability this year. Maybe they get to pass that on to consumers. But we had last week’s PPI, producer price index, or wholesale inflation numbers, they came at 6% higher from year ago numbers.
Kevin: And that’s a little bit like seeing the train coming, right? That’s the front of the train, but the caboose is how it shows up in CPI.
David: Right. So you’ve got Detroit talking about these input costs. Not a surprise, PPI inflation is higher. Wholesale prices, or PPI, that swirls through the economy and later gets reflected in CPI, consumer prices, as the wholesale prices get passed onto the consumer. And also gets reflected on a lag into PCE, which is the Fed’s preferred inflation measure. Again, that’s months ahead. By extension, I think we can expect more stress in the sovereign bond market. If more inflation is coming, there’s going to be more stress in the sovereign bond market.
Kevin: Sure.
David: So CPI was already hotter than expected at 3.8% in April, up from 3.3% in March. But there is more in the pipeline. And I come back to those Detroit figures. To date, the big three auto are absorbing those costs. They have yet to make the C-suite decision to pass on those costs to consumers with higher auto prices. But I think that’s kind of a not if, but when scenario.
Kevin: Okay. So the cost of cars are going to go up. But everything, I mean, we get packages from Amazon almost every day, Dave. So the cost of transporting things with fuel prices being what they are, I would imagine that’s going to show up in the product itself, isn’t it?
David: I read New York Times articles and Wall Street Journal articles last week that felt like an episode of VeggieTales. Do you remember that?
Kevin: Oh yeah. Yeah. Our kids grew up on VeggieTales.
David: Mike the cucumber.
Kevin: Yeah.
David: I forget what the tomato’s name was. But yeah, salary costs are on the rise due to a 46% increase in transportation costs from West Coast growers to East Coast distributors. I suppose it’s not that bad if you’re on the West Coast eating celery. Tomato prices higher by 40% in the month of April, in the month of April.
Kevin: Wow.
David: Granted, that’s weather, that’s tariffs, that’s transport costs. It’s all of those three things, kind of the negative trifecta for tomatoes. Diesel at 5.66 a gallon gets priced into everything that is moved by truck.
Kevin: Right. UPS trucks, what have you, delivery trucks for produce. But the economy, we’re not in a recession yet. So does this turn into a recession?
David: I think it’s possible. You’ve got bond market pressure. The US economy is still in decent shape, certainly for half of the K. The bottom half of the K is not in as good a shape. But the last reading of the Atlanta GDP now was 4%. And we get a fresh number later this week. And the current forecast is still 4% GDP growth for the next—
Kevin: So we’re still growing.
David: Correct. So the US has an inflation problem, but it has growth as well. That’s a better position to be in than many parts of Asia and Europe, which have stagnating growth and inflation. So stagflation’s an issue elsewhere, not really here at this point. We have a brighter outlook. US unemployment is 4.3%. Compare that to French statistics, over eight. And you can see a different level of stress in other parts of the world. In the UK, it’s 5% unemployment. In Germany, it’s 6.4. So 4.3 looks pretty good, relatively speaking.
Kevin: Yeah. But okay, going back to inflation, remember the word transitory was being tossed around a few years ago? “This is just transitory inflation. It’s not going to come back.” It looks like it is here for the long run, doesn’t it?
David: I thought one of the best articles I read this last week was in the Financial Times, a piece by Lael Brainard, retired from the Federal Reserve, and she’s basically making the case that it’s the accumulation of shocks that have to give you pause as you consider this issue of transitory. If it’s one thing, maybe it’s one and done, but you start adding together a series of shocks, and it’s not going away. And so her encouragement to Kevin Warsh, the new head of the Fed—what a great week for the new head to take the helm at the Fed with bond prices—
Kevin: With the bonds doing what they’re doing.
David: I know.
Kevin: Yeah. At first, I wondered if it was possible that it was because he was taking that over.
David: No, no. But Brainard’s encouragement to Warsh is, pay attention to the dissenting voices, and the dissenting voices, you had three dissenting voices, all of whom are no longer inclined to lower interest rates. They’re neutral to inclined to increase interest rates. And again, this comes back to your point of, if inflation’s transitory, you can probably make that case—if you’ve got one shock. If you have an accumulation of shocks, then you’re probably dealing with something that’s going to stick around. So higher inflation for longer means higher rates for longer. That means our entire economy and financial market is overgeared. It’s overgeared for that environment. You get too much leverage.
Kevin: That analogy of shocks to the system, as I age and as I know people who age, that’s sort of the aging process too. You can handle the shock, you can maybe handle two, but when they start piling up, and in a way, inflation is the pain that comes from that sequence of shocks. They probably could have handled inflation if we didn’t have $40 trillion in debt.
David: Yeah, you’re right. I mean, I think of somebody in their 80s who maybe breaks a hip.
Kevin: Right.
David: But while they’re recovering contracts pneumonia, and you start seeing this sort of pile-on effect, and now all of a sudden you’re dealing with a health crisis.
Kevin: Yeah. It’s no one thing.
David: Right.
Kevin: Yeah.
David: So the shift in bond sentiment signals that a prolonged period of higher inflation, it’s getting factored in.
Kevin: Mm-hmm. Yeah.
David: The bond market is now factoring that into sovereign debt. So that you’ve got the energy crisis dynamics, of course those are global. You’ve got 80 countries which have already introduced emergency measures to protect their economies from the surge in energy prices. So not only do you have the inflationary impact from the energy crisis, but you’ve got additional fiscal strain as 80 countries seek to bail out the consumer and soften the blow of that inflation, but they’re layering in an extra layer of weakness in the fiscal backdrop.
Kevin: So as we talked about last week, I talked about a client that holds real estate right now that they’re hoping that interest rates will go down because it’s variable rate. And for the person who has an investment where they have to know the direction of interest rates, what you’re saying is the interest rates have to go up.
David: Direction of travel is pretty clear.
Kevin: Yeah.
David: So I mean, in theory, higher inflation should translate to higher rates, and in practice that’s exactly what we see happening. Higher rates are a financial market risk. We’re likely to see that risk materialize in the third and fourth quarter of this year.
Kevin: So the fall and winter basically.
David: The financial markets begin to absorb the fact that not only is the energy shock not transitory, but the inflation impacts are not transitory, the fiscal issues are not transitory, and rates are going to be higher for longer, whereas at the beginning of the year there was this belief that rates are coming lower and liquidity is going to be abundant and speculation can continue without limit.
So these are things that are beginning to change. I think, again, higher rates represent a significant risk to the financial markets, bond market in general, but equities in particular as we get into Q3 and Q4. Jim Grant pointed out in his most recent missive that CPI responds with a roughly hundred basis point increase for every 20% increase in the price of oil.
Kevin: What would that translate to?
David: Looking at what we’ve had in terms of an increase in the price of oil so far, you can add 1.73% to February CPI.
Kevin: And that’s just based on the oil price.
David: Right. So reasonably expect 4.1% CPI inflation. We’re at 3.8 now. The next print, don’t be surprised if it’s moving in the direction of four. Expect another bump in May, and if we continue to drain oil reserves in the context of 20% of global supplies remaining offline, you could see significantly higher oil prices.
If that’s in the cards: higher oil, higher CPI; higher CPI, higher interest rates. You’re going to get more pressure on sovereign bonds as the year goes by. The only out here is for some combination of the Federal Reserve and the Treasury to coordinate their efforts and start buying down rates.
Kevin: Right.
David: But that has its own—
Kevin: That’s inflationary.
David: That has its own negative impact.
Kevin: Yeah.
David: Nevertheless, when you start monetizing debt, some people will say, “Well, don’t worry about it. It’ll be sterilized and it’s just not a big deal.” Okay, fine. We’re just going to say that credibility is at stake. If no one is willing to buy your debt and the Treasury or the Fed end up being the buyers of last resort, it’s a tell in the marketplace. You get way too much supply. There’s not enough demand. That in itself is a signal to bond traders that rates should be higher, and the only way that they are willing to— The only reason they would step in and be a buyer, not of last resort but of first resort, is if they’re adequately compensated.
Kevin: Well, and this is why you said the entire yield curve at this point, all the Treasuries, no matter what the length or duration, are higher than the average interest that we’re paying right now.
David: Yeah. Just for the record, we’re now past the five-year mark with CPI being above the 2% target.
Kevin: So much for transitory. Five years above the target.
David: And I know they’re very intent on bringing it back to 2%, but so far their best intentions haven’t amounted to jack—
Kevin: Diddly.
David: Diddly.
Kevin: There you go.
David: Thank you.
Kevin: Yeah.
David: So they’ve got a credibility issue to begin with. They cannot really tempt fate with compromising their credibility any further by being the buyer of last resort for Treasury bonds. If they do, I think you’re talking about a very slippery slope within the sovereign debt markets, particularly in the US.
Kevin: Let me just ask. If that happens, we could see a dip in interest rates. If they’re coming in and actually becoming the buyer, they’re going to buy at the rate that they want to buy them at to show the markets that there’s stability. So for the person short term, if they’re saying, “Well, what happens if interest rates don’t go up?” it’s probably because they’ve done that, right? Yield curve control?
David: Yield curve control. I would be looking for who’s doing the buying, who’s doing the buying, because at this point we’ve got enough debt in the system. The only ways that they can reasonably manage it, financial repression and inflation, and I think you could describe yield curve control as an expression of financial repression.
I mentioned it earlier, but I think it’s important for this point to sink in. One-month T-bills are 3.7, two-year Treasury’s, 3.94. 10-year, over 4. 30-year is over 5. The average yield on all federal debt, 3.37. Our entire yield curve is higher than the current average interest expense, and we have 33% of all outstanding Treasury debt that needs to be rolled over in the next 12 months.
Interest costs are going higher, and that is a fiscal nightmare. That is a problem. Set that aside for a moment. You’ve got Fitch, the rating agency, which is looking at our GDP figures and our debt-to-GDP figures are deficit rather, deficit-to-GDP figures, this year they’re expecting 7.9% deficit-to-GDP.
Kevin: Wow.
David: I don’t think outside of COVID or a world war it’s ever been that high. So interest costs are likely to go a lot higher. It’s fascinating because Trump wants to own the success of the Dow, wants to tie his legacy to stock market performance. But what about if he’s faced to own a fixed income failure? And when I say failure, I mean an extension of what is already a six-year bear market in US government bonds, but a bear market that is, by the numbers, on track to get even worse.
Kevin: So you talked about Trump wanting to own the stock market success, but your typical broker, the 60/40 portfolio, would say, “Well, if the stocks look high, you’re going to go into the bond market.” But right now what you’re saying is there’s really no direction to step unless you step out into gold.
David: Coming back to Mike Wilson’s comments last year, this is 2025, this is not a one-month market call. When he suggests moving from a 60/40 balance, 60% equities, 40% bonds, to a 60/20/20 portfolio where what was previously fixed income is now split between bonds and gold, 20% allocated to gold.
Kevin: That was a radical shift.
David: It is a radical shift.
Kevin: For Wall Street.
David: And this is not a singular analyst embedded somewhere deep in the bowels of a Wall Street firm. This is the chief investment officer at Morgan Stanley—like a guiding, a leading, role within that community—to say, “We’ve come to the conclusion that there are structural impairments within the fixed income market, and you want to reduce your portfolio in fixed income by 50%.” That’s another way of reading the 60/20/20 analysis.
Kevin: Right. And how often does Morgan Stanley say, “Go into gold”?
David: And there’s added value in this context of lowering your total volatility by having a gold exposure set next to the fixed income exposure and right alongside your equities portfolio.
Kevin: Mm-hmm.
David: So let’s talk about gold and silver. I think the best news out of last week for the precious metals is from the bond market. Granted, metals are still in a corrective phase, off of their January peak levels, and that correction has further to go, but not a lot further. If sovereign bonds are signaling stress, and haven scarcity becomes more of an issue, I think you’re looking at a sweet spot for gold between now and the end of the year.
Kevin: Well, and you have a captive audience buying gold. I mean, the central banks are buying gold. They don’t care what the price is. They’re buying more right now than they have been in a long time.
David: Well, but apparently in the first quarter they did care about the price because they went from slowing the pace at the end of the fourth quarter and into the first quarter—January was pretty tepid—and we get the price to roll over and 369 tons of purchases. That’s significant.
Kevin: That’s a big buy.
David: Q1, 369. If you net out the 125 tons of liquidations, 244 in purchases on a net basis for the quarter, that’s impressive. So central banks are buying these prices. Most investors don’t appreciate just how thin the physical gold and silver markets are, and it doesn’t take a lot of buying to move the price. In fact, central banks are largely responsible for the move through 2022, through 2023, through 2024, halfway through 2025. You really only see an investor footprint in terms of volumes of transactions in ETFs and OTC demand in the back half of 2025 and in the first month of 2026.
Kevin: Right into January of ’26.
David: Right.
Kevin: And then it just went away.
David: What has defined this bull market since 2022 has been central banks. Central banks are maintaining the floor in metals prices. Let’s call it 4,000. I think it’s investors who will define the ceiling, and I think they’re going to break the ceiling this year. Wall Street firms see year-end pricing at new highs. They see something in the gold market. They see— I don’t know if stampede is too— We’re back to hyperbole. Maybe that’s overstating it, but they see enough buying to elevate the price.
Kevin: And they’ve set their predictions. They’ve actually set the numbers that they’re looking for.
David: I think we’re likely to see a correction low between now and the end of June. We resume the upward move with a strong year-end finish from June through December. And price estimates across Wall Street firms vary, but it’s an interesting sampling. You’ve got Goldman Sachs at 5,400 by year-end. You’ve got UBS at 5,900. You’ve got Deutsche Bank at 6,000. We talked about Deutsche Bank a few weeks ago. They see 8,000 very much in the cards. 8,000 is their base case, not for the year-end 2026.
Kevin: They were talking over the next five years. They hedged themselves.
David: Exactly. But Deutsche Bank does see 6,000 by the end of the year. JP Morgan, 6,300. So what is it that Wall Street is concerned about such that they would do something which is very uncommon for them—say anything positive about the price of gold?
Kevin: Right. Do you think it’s because they know interest rates are going up and they know also that’s not necessarily strengthening the currency right now?
David: And it’s not necessarily an indication of a strengthening economy. We do have a fiscal issue. It’s not rocket science to say 40 trillion is a big deal, and the interest expense exceeding our defense expenditure is a big deal, not sustainable. So if our debt markets are not sustainable, what does that mean for the direction of travel with interest rates?
Kevin: Right.
David: Higher for longer. Higher for longer. So sovereign bond stress is a critical part of the gold story now, and I think in the years ahead. Waning confidence in the group of seven, again, we go back to the G7, whether you’re talking about their treasuries or their currency managers, waning confidence in that leadership and those institutions is a part of the demand story for gold where investors rethink risk broadly.
They rethink risk in bonds. They rethink risk in equities, which is natural as the cost of capital increases. They should be reconsidering the kind of vulnerability that they have to that sustained, sticky, higher interest rate environment. And when there is a reason to reappraise risk, what is your counterparty-free haven asset of choice?
Kevin: Right. It’s gold, but—
David: Gold first, then silver.
Kevin: Yeah. So let me ask about silver because the ratio over the last couple of weeks, we got it down into the low 50s. Is it going to go further?
David: We’ve seen volatility, which has made for some healthy trades from silver to gold, 43 to one was the low tick, went back to the 70s.
Kevin: Then what’d we get to last week? 52?
David: 53 I think was the low.
Kevin: Okay. Yeah.
David: So by the end of the year, I think we have an attractive swap from silver to gold. What that implies is that gold finds its feet midyear and starts marching towards some of Wall Street’s expected numbers, 5,400 to 6,300, in that range. And silver, as it follows, moves that much faster. One of the advantages of silver in this particular market is GDP is not falling to pieces. If you’ve got economic growth and inflation at the same time, your white metals run red-hot.
So the potential for silver to outperform gold in 2026 I think is greater than what it was in 2025. And again, we come back to this issue of, do you know how thin the silver market is relative to the gold market? It doesn’t take much investor capital for it to move, and when it moves, it moves on an exponential basis. Gold up 65% last year, silver up over 150. That’s a common characteristic.
Kevin: So this correction right now—
David: When silver finds its stride.
Kevin: Well, and this correction right now in gold and silver is just a blink in time is what you’re saying. You don’t treat this as a long term?
David: Right. I think by the end of the year we have an attractive swap because I do see silver outperforming gold between now and the end of the year. It’s going to underperform as long as gold’s under pressure. It’s going to be under double pressure. And as gold finds its feet, silver I think has a launching point which is pretty attractive. So ratio, I think we go back into the 40s. We had 43 in January. I think we recover the 40s again. If Bank of America is right, maybe even we see 30s. And again, that’s the ratio of silver ounces to gold.
Kevin: That makes great trading.
David: Absolutely.
Kevin: Yeah.
David: No, it sets you up.
Kevin: Beautiful compound ounce opportunity.
David: Absolutely. You need to think about that. You need to prepare for that. You need to do that on an incremental basis. Don’t fall in love with some number in the 30s which may or may not materialize. What we’ve always said is when you’re trading the gold-silver ratio, you do it in five point increments. So if your first trade is at 55, the next one is at 50, the next one is at 45, the next one is at 40 and you continue to do partial allocations or re-allocations, migrations from silver to gold in that kind of stair-stepped manner.
Kevin: Okay. So one of the things that I’ve been telling clients is, because we have a lot of clients and this thing can move very, very quickly. So I’m saying maybe once a week, you don’t have to do it every day. Just divide the price of gold by the price of silver, and look at what the ratio is. And if it starts to look attractive from what you originally purchased your silver for, call us because it may be a swap opportunity. It may be a compound ounce opportunity.
David: It’s shocking how many people don’t follow the metals markets. I was in a conversation with the gentleman here in town earlier this week, and he was like, “Silver’s gone up so much. It’s almost 50 bucks.” And I’m thinking he is not even aware that it blew past a 50-year ceiling at $50.
We have essentially put in a new generational floor at $50, and the closer we get to that $50, the closer you’re getting to a springboard into the next period of growth in the silver market. He has no idea that we’ve been to 120. He has no idea what the opportunity set is. He just thinks silver is expensive as it approaches 50. He’s not even paying attention.
So yes, I agree with you, clients should look at their holdings, see what their proportions are, have that discussion with their advisor ,and map out the strategy for five point incremental moves coming out of silver to gold. And as we go back the other direction, because volatility goes both ways. And I’m telling you, volatility is your friend if you care about compounding ounces.
Kevin: And you compound right back into silver when it drops down to 80 or 90. Who knows?
David: Over time, you’re growing the total number of ounces that you’ve got. So price action may be uncomfortably weak at present, but it’s one line on a page. It’s one page in a chapter. It’s one chapter in a book. And I think the gold story is becoming more compelling, not less. And the prices, at least for now, even more approachable.
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Kevin: 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.
