Your Questions Answered Part 2

Weekly Commentary • Dec 31 2019
Your Questions Answered Part 2
David McAlvany Posted on December 31, 2019
  • Your questions answered part 2 2019. Thank you for a great 2019 and for listening to the McAlvany Weekly Commentary.


The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Your Questions Answered, Part 2
January 1, 2020

“People today would look at gold and say, ‘Why would I allocate to gold when there is only upside in the market?’ You, my friend – if that is your mindset, you have been manipulated, you are controlled, and your actions are contributing to the distortion in asset prices where gold may be lower than it could have been, or ultimately will be, and stocks are higher than they can stay forever.’”

David McAlvany

Kevin: Well, this is week two of our question and answer program, Dave. I always love these shows, like I said last week. You were talking about curiosity. Curiosity and deliberate life. I’ve told you in the past I have always enjoyed watching and being around your family, because not only are they curious – you’re a very curious guy – but they are very deliberate in look forward and making legacy-type decisions.

David: One of the things I love about doing these programs at the end of the year, and I hope this sets the tone for next year, as well – number one, it’s very clear that we don’t have all the answers to all the questions, and number two, there are more questions that haven’t been asked yet that are very, very important.

Kevin: Sometimes the question is more important than the answer.

David: And so when we go into 2020 I think one of the things we have to bear in mind is that everyone who is thinking, “Should I ask this question, or is it worth asking?” It absolutely is. That is the nature of curiosity and exploration. Don’t invalidate what is on your mind in terms of a question. Ask it, and then pursue the answer.

Kevin: Yes. And reading and asking outside of your field of expertise, that is important as well. So let’s get started with the second program. This next question is from Alfred:

Hi guys. Always enjoy your podcast and appreciate the financial education. Thanks in advance for indulging me here. I’ll try to be concise.

And then he puts his concise question, which is very, very short…

David: Two pages?

Kevin: No, no, no. The first one is very concise. He says:

How will this ultimately play out?

Okay, so do you have hours and hours? Or why don’t we go to the real question? This is the next one. It’s a little longer, but I think he’s being a little bit more specific. The real question is:

Certainly in agreement that long-term, maybe not so long-term, hard assets and precious metals and related stocks will be the preferred, if not the only place of refuge. That being said, we are truly in unprecedented times with negative interest rates, which is, in essence, a default prior to issue, albeit most people who have been part of defaults would be ecstatic with 98% capital retention, half of the corporate debt being triple B, etc. But in a world where printing money is unrestricted, and the people have enough confidence in the currency, as crazy as that may seem, maybe they can really keep the faith. So what I’m wondering is, how much thought do you give to this merely continuing on as it merely has? More specifically, slower and slower growth? More money-printing? Pockets of the marketplace collapsing?

David: Let me go back to the first thing, how this will ultimately play out. I’m going to tell you how it’s going to play out for me. I’m going to enjoy my family. I’m going to read lots. I’m going to exercise and stay healthy. I’m going to invest in relationships. I’m going to balance a portfolio for multiple outcomes. How this all plays out, we get to enjoy each day and the immediate future according to the choices that we make.

Kevin: And spiritual health. That’s part of the legacy, as well. What’s eternal?

David: But how does this play out in terms of what are the final outcomes, I totally get the point of the question, which is, are we veering toward an Armageddon crash, or does this stretch itself out over such a prolonged period of time that, really, nothing changes except for these little pockets of implosion. That’s where, over a long period of time, you see the devaluation of a currency, and it’s sort of buying some sort of economic and financial market stability, while at the same time basically being the long-term saga of the death of a currency.

Can that occur? Can that happen? I think that is, to some degree, what is happening. Do you ultimately have that Armageddon type crash? Well, it’s possible, too. Contagion is a real factor. If you look at the math of catastrophism, when it happens, it goes, and it just goes, because now you’re talking about a collapse, and a collapse of confidence is something that is, as we have often said, a sociological event, it’s a psychological event. It’s not just an economic or monetary event.

So when people think about inflationism, or inflation of asset prices, they tend to think in terms of the math behind it, but there is a psychology behind it, and there is a sociology, as well, and these are bigger factors which leave open that possibility of a ridiculously horrendous crash. But we do have a slow-moving train wreck already. That is what we have.

We talked about the perspective triangle earlier. One of the things we try to do on that Wealth Management side, on the growth and income side, is not play for our worst case scenario, but maintain the disciplines to manage risk in the environment and have exposures that do well in this kind of environment where you have inflation of asset prices, and things continue to move up. On the other hand you have to balance that out with things that are not necessarily tied to growth in either the domestic or international economy.

So really important for us is managing risk on the downside and having a methodical way of doing that. Working with Doug, working with Lila, working with Robert, our team is as cohesive as it has ever been and managing toward what Alfred is describing. What if this just goes on and on? Well, look, if you’re playing for the Armageddon scenario and it goes on and on, you’ll just be sitting there looking like an idiot.

Kevin: This is where the triangle works because you don’t have to be right on either outcome.

David: That’s exactly right. So again, that’s not high math, but it is a way of thinking, “Do I have my mandates balanced? Do I have something that is in play, growth and income? Do I have something that is in play, liquidity, in case something does come up that I want to buy? I talked to a friend today who is looking at a house not far from here – beautiful home. I hope he uses some of his liquidity to take advantage of it. I think it will be an amazing asset purchase for him. But what about the insurance piece? The perspective triangle just helps you organize your mandates.

Kevin: This next question is from Wesley, and I’m going to actually summarize it, Dave, because what he is talking about is using our monetary system as a form of warfare through SWIFT, through the dollar reserve system. Can you address that a little bit? I know you have friends who are in the business of managing money. And also in the form of warfare I’m thinking, in particular, that gentleman that is with the U.S. Treasury that lived in Saudi Arabia, I think, for eight years, that you got to know?

David: Yes, he got his job there with the Treasury from Juan Zarate, who wrote the book, Treasury’s War, so they knew each other well. Juan basically posits in his book that the Treasury is a complement to our system of international governance, and we get to pull levers and push for more influence and control through things like SWIFT and the flow or limitation of the flow of capital. So SWIFT is one of those things that is sort of foundational to our presence in the world, and obviously, if you look at the rest of the world, looking for alternatives to SWIFT it’s because they don’t like the amount of control we have in our relationships with them.

So there is another point to Wesley’s question which is dealing with foreign currencies, and specifically, debt that is issued in foreign currency terms. I think he borrows some from Jim Rickard’s book Currency Wars, and some ideas there. I think one of the reasons why you have so many people issuing debt in U.S. dollar terms is because it allows them to attract a larger audience of lenders. So the borrower is saying, “I’m going to pay you back, and I believe myself to be a good bet.” And the lender looks and says, “Maybe you are, maybe you aren’t, a good bet. Now I’m going to have to make a double bet, if it is, on the one hand, your reliability making payments, but also, the reliability of your domestic currency. Why don’t you put those things in U.S. dollar terms and it eliminates one of the risk variables for me?” So you’re able to raise more money in the capital markets in U.S. dollars terms than you would be just in foreign currency terms because there is, again, for the lender, one less risk variable there.

So think about the motivations of the borrower, think about the motivations of the lender, think about the need for more debt financing, and I think that actually goes a long way toward why people finance their cross-border debt in U.S. dollar terms versus foreign currency terms.

Kevin: This is from a long-time listener in the Pacific Northwest. Dave, I’m just going to preface this by saying this is always a hot potato, or a cold potato. It just depends on what side of the issue you’re on. So starting with the question:

Not sure if you’re familiar with Adapt 2030 podcast but they’ve been rapping about the possibility of global cooling as a result of cycles of the sun reaching a grand solar minimum. These cyclical patterns are said to coincide with increased cloud cover, volcanism due to increased cosmic rays from the weakening magnetosphere. If true, we could be seeing successive crop losses leading to food price increases globally, and increased tension in the next few years. It seems plausible to me, and my question is, how plausible is it to you guys? Regardless of whether we are heading into global warming or cooling, climate change is real and the risks to food supplies never seem to get any press in the mainstream media. This could be a major geopolitical driver of world events heading forward. Would love to hear a show on this critical issue with an expert or two. Sincerely, thanks, from a long-time listener in the Pacific Northwest.

David: Well, now I’m getting close to the edge of what I don’t know, and I thought you were going to say “hot potato, cold potato,” and then launch on something for velocity of money because that I would be very comfortable with.

Kevin: I don’t usually come to you for environmental questions, Dave, but maybe I could.

David: Let me start with something general, and then maybe you can add something more specific. The general comment is, regardless of how you view climate change, I think it is very important to look at the honesty and the goodness of politicians, and I suspect that when you’re whipping the public into a frenzy on any particular issue, it doesn’t matter what the point of panic is, the sponsors of that panic generally serve to benefit from the prescription that they offer.

Kevin: Ulterior motives.

David: So diagnosis, diagnosis, diagnosis, diagnosis, prescription. And so if they can create consensus on what the issues are, and then what the solutions are, and they happen to hold the solutions, then again, I’m more suspicious of the goodness of political machinations, political policy-making, of the justification for more experts. This really does go back to the conversation we had with Paul Tucker, where Paul would say, not only do monetary policy mandarins have nothing to do with climate change, they should stay out of it. It has nothing to do with their mandate. They cannot move the needle on that. To pretend that they can is to misunderstand what monetary policy is.

But I think the larger point of his book is that we have experts who are unelected, and they make rules and regulations, and I am just really nonplussed. I am not enthusiastic about the idea of creating new branches of government with open, unending mandates based on the current fear which is in the marketplace. And it’s a global frenzy on climate change to the point where I think if you said there was something called a climate messiah that we would all fall at his feet and worship him because he would have the answer to this problem which is our sure death and destruction.

Kevin: Sometimes you can find out the truth of an issue when you look at what the pushback is, and if you’re someone who actually challenges some of the science of global warming, that type of thing, you can’t get published in the academic world, so there definitely is an agenda, whether there is climate change or not.

David: Yes, but neither one of us have said actually anything positive or negative on the issue of climate change.

Kevin: Right. Hot potato, cold potato. Hot potato, cold potato.

David: Why don’t you hold it?

Kevin: Well, why don’t we talk about sunspots for a second because this is something that we’re going to hear in the news.

David: And it actually is not related to the current issue of climate change, although there is a confusing connection.

Kevin: Right. And it could be, it might not be, but there is something called the Maunder Minimum that occurred back in the 1600s when Galileo first started looking at sunspots when he first started looking at the sun with a telescope. That ultimately blinded him.

David: Whoops.

Kevin: That was a problem. But he was a fascinating guy because he also was studying the moons of Jupiter and movement there. And then he started to go blind as he was counting sun spots with a telescope. But here’s the thing. In the 1600s the sun spot activity went to a very, very low minimum.

David: That’s the grand solar minimum you’re talking about.

Kevin: Yes, that’s right

David: And a period of coolness.

Kevin: But they don’t know that they went together. And just like the author of this question says, volcanoes also could have caused this coolness in Europe. There was about a 60-year period of coolness. So again, we’re going back to correlation versus cause.

David: And you’re saying that, actually, the cooling predated the issue of grand solar minimum. That was already in place. So you would have to go back to the 1500s and say, actually, we were in motion already on this, prior to the grand solar minimum. Causation, correlation, and the confusion therein is what is a part of this, to say now that because of the weakening magnetosphere…

Kevin: But bring a politician in and they’ll say, “Oh, you know what? I can help you with sunspots. We all need to help with sunspots.” And somehow, someway, agendas get moved and some people get rich and some people get poor, and it’s like, what just happened? Because it really didn’t change the sun at all.

David: Yes, the nature of politics is about how to move as much money as possible to your constituents, and some of your constituents may be your friends. And so this is where, again, I’m suspicious. Give me a reason, give me a justification. And if you can tap primal fear in any way, then I have a blank check. And what politician have you ever met that hasn’t had a blank check? We’re coming into a phase where it really is going to be that everyone is writing blank checks to solve climate change, and that’s like political paradise.

Kevin: Paul Tucker sort of chuckled when we were talking about the new European central bank’s mandate to help with climate change.

David: At least that is what Christine Lagarde has signed herself on for. But I think in fairness to that long-time listener in the Pacific Northwest, we should have a commentary guest who can better lay out what the issues are in play with climate change. And if we just say for the sake of argument that we have a significant shift in constrained food productivity or whatever, yes, you have political tensions in China, you have geopolitical issues. So you are right. If there is a continuation of trend where we have crop losses for any particular reason, yes, you’re moving into a period of global crisis, which is also a period of extreme probability for war and conflict.

Kevin: Your family has always been oriented toward some form of preparation, letting everyone know: be prepared if things do change. Don’t be so dependent on any one system that could be vulnerable.

Question from Rick in San Diego:

Hi Dave. From time to time on the Weekly Commentary you mention books that you consider must-reads. If you wouldn’t mind, I’d love to see a list of some of your favorites, but even more so, I would be interested in what you might recommend as must-reads for kids around ages 8-10. Thanks. I enjoy the weekly discussion.

David: Rick, in a world of continual website updates, I used to have a list of books in the resources section on our precious metals brokerage website, mcalvanyica.com. It may still be there, honestly, I do not know. If not, we can get that up and published for you. But to your second point, must-reads for kids ages 8-10, we have a spectrum of readership in our family from very strong readers to really not interested as much. So an 8-10 year-old is not only a wide enough spectrum in age and ability, but even natural ability within that.

Kevin: You do have a 13-year-old, though, that you can’t tear a book out of his hands.

David: No, that’s true. We went to the Nutcracker the other night, and it was so funny, I looked over and he reading a book, and he looked over. And to his sister’s and my wife’s chagrin, I was reading a book, too. My wife got after me, not him. I had to put mine away.

Kevin: (laughs)

David: But to the point, to the question. There are a couple of things. I think I would categorize books according to where you want impact. If it is how you understand economics, for a young reader something like Whatever Happened To Penny Candy?

Kevin: That’s Richard Mayberry, isn’t it?

David: Yes, it’s a great conversation starter. If you’re talking about gaining a language of communicating an interior life, there is a book that I read with our kids a while back called The Bridges of Chara. It is an allegory and it begins to flesh out some of the language that you need to know to be able to appreciate your inner landscape and to be able to talk about it. Frankly, it would be good for a 28-year-old or a 58-year-old or a 98-year-old to read.

Kevin: I’d better read it. I’ve never heard of it.

David: But it’s one of those things – categorize that as sort of emotional development. Probably a little bit more advanced, but I think it opens up really interesting conversations about who you live for. Is it just for yourself or for others? Bob Goff wrote a book called, Everybody, Always. Its focus is, really, just on how other-centeredness is a powerful thing in the world that we live in – getting outside of yourself. He is a lawyer, and a really good one. That might be more of a 10-12 year-old’s book.

Let me get to a couple of other ones. The Dangerous Journey, which was edited by Oliver Hunkin. I think that is a great one. History Lives, which is a five-volume set put together by Mindy and Brandon Withrow. And then I’ll just give you a couple more which I think were great. You probably know The Secret Garden. It has been made into plays and what not. There are two other ones by the same author – Little Lord Fauntleroy, and the other one is A Little Princess. There are so many character principles, and you see transformation occur from a selfish little brat to someone who appreciates the other, or is able to bring in a higher ethic to how they live their life. Again, The Secret Garden, Little Lord Fauntleroy, A Little Princess – all of those are great.

The same kind of transformational story in terms of maturing, starting at one place and growing up a little bit is The Miraculous Journey of Edward Tulane. Those are kids’ books that jump off the shelf at me in that 8-10­old range, maybe for a strong reader. But if not a strong reader, something that could be read out loud, and that plays very well.

Kevin: I think what we have to do, though, Dave, is go back because I haven’t looked in a long time, either. We should check if that booklist is there because we have added books as we have had authors on the show, as well, because you’ll read a book, you will go pursue the author, and then we’ll recommend the book, not necessarily because the author is on, but because you start to realize it is part of the content and the context of the thinking of the show.

David: And I think one of the things to keep in mind, and this is just kind of a general principle of, not only what goes into a library, but also what you read, and when and why you read it. Somebody may recommend a book to you, and it could just be awful. You pick it up and you think, this is just not hitting anything. No hot buttons here. Twenty years later it changes your life. And it’s not that the book was bad, it is that the timing was off. And so I think it is important to read where you’re curious. It is important to dive in where you have a passion. You can destroy a child’s interest in learning and in books if you go through a random list and say, “Well, these are the classics. You have to read them.”

Kevin: And give books with no obligation. I had to learn that because my feelings would get hurt, or I would hurt other people’s feelings. But give a book with no obligation, let them know you won’t ask if it has been read. A lot of times people will come back many years later and say, “The timing was right, I read that book. Thank you.”

David: Right. That’s really what the exploration is as a parent, figuring out where there is the current question. What is the current curiosity? And how do you attach the right book to that, because now you have natural energy driving the pursuit getting through those pages. It’s so fascinating, I put some carrot juice on the table this morning, and everybody was pretty excited about it. And then I said that I also added celery and ginger. Everybody had been reaching for the glass, and all I had to say was celery and everybody pulled their hand back. So you have to tap enthusiasm. And there was enthusiasm, and then a buzz kill. The idea that someone is enthusiastic and reaching for it, that’s what you want with books. But you really have to be sensitive to the kinds of questions and the point of curiosity that you have.

Kevin: This next question comes from Timothy. He says:

Dear David. I have two questions: The birth rate in almost all developed, and most developing countries is already below replacement level. It seems that this trend is almost irreversible. How do you see the impact of declining populations on economies, societies and cultures?

That is the first question. Do you want me to wait on that?

David: Let me answer that one first because I think it is Japan and China as a preview of coming attractions. Anyone who has that issue of being below the replacement level – you have issues of fiscal strain and when you start looking at the commitments that have been made, we’re talking welfare commitments or social safety net commitments, you end up with math problems on the basis of that demography. And it means that future tax structure incentives within the market economies, if you are in a market economy, those things can shift.

Kevin: You brought up, I think, in a commentary not long ago, that more diapers are being sold to geriatrics in Japan than there are babies using the diapers.

David: Right. So fast forward and you have more people taking out of the system. They put in and they thought that the money was going to be held for them and given back to them with growth. As it turned out, most of those social safety nets are just an excuse for higher taxation, and there is no slush fund or safety fund that is actually there. So you have been financing the present day. Nobody was considering your future. That’s really the issue because the math begins to emerge. You have to have a certain number of workers to take care of a certain number of retirees.

Kevin: So the social security systems of those countries, maybe even including our own, would be at risk if you don’t have replacement.

David: Right. And I think what time reveals, and demography reveals, is where the social safety nets have been run fraudulently. Social Security has been run fraudulently. The Senate has robbed those funds. There are a few dollars there, but nothing like was supposed to be there because they broke the piggy bank and stole the money.

Kevin: The first part of the question was about people. The second part is about machines. He says:

Do you agree with Erik Brynjolfsson and Andrew McAfee, the authors of The Second Machine Age, that this time may be different for technological impact on economies and societies?

I haven’t read the book. Have you read the book?

David: I have started the book and invited Eric onto the program. So it’s great that you’re reading it. Timothy, we’re definitely on the same page in terms of some of our interests. The technological impact on economies and societies – again, I think you’re talking about why we’re having conversations in public policy circles about universal basic income. There comes a point at which the whole fabric of society shifts, the way we look at work and employment shifts, the way we look at income and how it is derived shifts. There are blessings and curses with an improvement in technology. I think some of the curses aren’t just at the level of loss of jobs or things that may be a little more obvious, but it’s loss of identity. It’s the social and psychological impacts of a broken workforce, or a newly constructed workforce.

And the argument is being made now that, as it has in past times, technology is freeing us to do more of what we want. I think we forget that we are who we are, in part, by what we do and our place in the world, the contribution we make, whether that is as a teacher, or as a doctor. I think there is a certain banality to free time, and a certain boredom. I think of all the famous people who have gained all the money in the world, and at some point have all the time in the world, and their lives veer toward drug addictions and unhealthy relationships. And it’s not like free time makes a free person, or free time makes for a better person.

And so, I do see sort of a downside in terms of a societal impact, and this isn’t me being – what do they call people who don’t like technology? – Luddites. I’m not a Luddite, I appreciate technology, but there are some unintended consequences in terms of personal identity and psychology, which I think we should be considering as we move sort of fast and furious toward a world changed utterly, and maybe forever, by technology.


Good evening, David and Kevin, I’ve been a listener of the Commentary for several years now, and I understand about half of the content.

Well, that’s better than me, Kelly, so you’re doing well.

David: We’ll work on clearer communication. The fault is ours.


But it still remains one of my must-listen podcasts every week. Personal context: I’m married, with one child now in college, a house with a mortgage, one car payment. I’m employed full time with a very good income for middle class in my part of the country. We’re saving for retirement with a combination of traditional IRAs and my 401k. We are setting aside some money in bank savings and Vaulted, which I really like, by the way. Here is the question: Is there something I should be doing, or avoiding, in light of the growing credit bubble in the next months and years as it pertains to my position in the middle class? I really enjoy your podcasts. Keep up the good work. Thanks, Kelly.

David: I think one of the challenges faced by many in the middle class is this idea that you mark your progress by the things that you have, the clothes that you wear, the house that you live in, the cars that you drive, and that is where we get that sort of keeping up with the Joneses. So, not to just fixate on socioeconomic status in the context of this question, but I do think bringing that into what is a general tendency of the middle class into where we are at in terms of the credit bubble, just a couple of things. You’ve got to avoid buying depreciating assets.

Sounds simple, but there can be what we will call the middle class malaise where maybe you don’t love your job and that’s why you live for the weekends and that’s why you justify the boat, the four-wheeler, the this, the that, and the other. They are all depreciating assets and it costs real money in terms of earnings, savings and everything else. But the day you buy it, it is worth a third less, the year after you’ve driven it around it is worth half less, and it’s just no way to advance where you are at, or to position yourself advantageously in the context of a major credit bubble.

I think this applies regardless of socioeconomic status – avoid conspicuous consumption. We’re moving into a period of time where those marks of distinction, whether it is the blue box from Tiffany’s, the red box from Cartier, or the insignia on the front of your car – BMW, Mercedes, whatever it may be – it shows well from a sociocultural standpoint, but I think in the context of the months and years ahead, in terms of a growing credit bubble, as that unwinds I think you begin to see tendencies toward envy, tendencies toward redistributionism. As we consider the 2020 political field, or the 2024 political field, think about who fills the Democratic primary today. Half of them have said, “We are socialists.” Democrats – that party tag line doesn’t even fit. They would say that their real belief system is more in line with a socialist platform. Maybe they should run as socialists instead of Democrats.

All that to say, do you really want to stand out from the crowd? I’m not sure that in the next 3, 5, 6, 7, 8, 10 years, that’s a wise thing to be doing. So those are just some practical considerations. What you’re doing now, Kelly, I think makes a lot of sense. You are living beneath your means, otherwise you can’t have the extra money to put into bank savings or vaulted. You wouldn’t be putting into your traditional IRA or 401k. So you’re doing what you need to do, and in addition, having a game plan for reducing your debt, I think is absolutely wise.

You have a mortgage, one car payment – great. Make sure that you’re not using your credit cards as anything other than a monthly float, paying them off at the end of every month, but also making sure that you’ve penciled out, whether it is on an Excel spreadsheet … your sort of date with destiny – when are you paying off the mortgage and car payment? Those are things that represent emotional space, as much as they do financial freedom.

Kevin: This next question comes from Marty, and I can hear the fatigue in Marty’s voice:

When do you think that the manipulation of precious metals by the bullion banks and the Fed will fail and we will have a free market again?

Marty, I can hear your frustration (laughs).

David: Well, let me take a little bit of umbrage with the question. It’s a good question, because there are manipulative tendencies in the markets today, but I would say it is far more dramatic in the world of interest rates and fixed income than in the area of gold. We have gold up 15% this year, silver up 10%, and at an earlier part of the year we were up 20% and 15% respectively. Mining shares are up between 30% and 40% this year. You’re talking about something that is operating on a somewhat free basis.

Kevin: A quasi-free market versus interest rates.

David: Right. I think the question implicit there is, why isn’t gold at $5,000 already? Why isn’t gold at $10,000 already? That is what I would read into the question because there really can’t be any frustration with the way that gold has behaved in the current period – 2016, 2017, 2018, 2019 – these are free market dynamics driving the price up from then to now by 50%.

Kevin: Can I say, Dave – I’ve been here 32 years. Back in the 1980s we talked about gold manipulation. Then in the 1990s we talked about gold manipulation. And then in the 2000s we talked about gold manipulation. In the 2000-teens and now we’re coming into 2020. And during that period of time, gold, yes, it was manipulated, but it was at $300 an ounce when I got here, then it went to $600, then it went to $900, then it went to $1200. Now it is at $1400-something. Yes, they manipulate, but it doesn’t really change the trend.

David: Well, in fairness, there is a difference between short-term manipulation and long-term manipulation, where I think you can level any market for a certain period of time, but not permanently. So if you want to pick a fight and jab somebody in the nose, that’s great, but is there anybody with the financial and monetary endurance to go round after round after round after round, decade after decade after decade? Because that’s what suppression…

Kevin: It doesn’t affect you if you buy and just hold. It does not affect you unless you are trading to try to make money.

David: When you started in the business in the 1980s, there were periods of time when the Saudis would come in and bear raid the crud out of the market and knock the price of gold down by 10%.

Kevin: So that they could buy more at a cheaper price.

David: Right. So is that manipulation? Sure. Is it for a particular party’s benefit?

Kevin: Do the Chinese maybe do it now? Yes, maybe.

David: Whether it is the Chinese or Goldman-Sachs – J.P. Morgan, I guess, would have “We are the manipulators” written all over them. But the point is, we do see free market dynamics in the gold space, and certainly we do see price manipulation. You’ve seen in 2019 and in 2018, a number of people, whether it is HSBC, or Barclays, or J.P. Morgan, people who previously were trading with them are being prosecuted for manipulation of price. I’m not saying it doesn’t exist. My eyes aren’t closed.

But we’re also not talking about a grand suppression scheme that has kept gold in the $250 to $300 range, because bear in mind, over the last 20 years, if you’re going back to that period of time, we still have gold out-performing the stock market over this 20-year period. So everyone is saying stocks are at all-time highs. Gold is not. Bear in mind, even not being at all-time highs, we have still averaged over a 20-year period almost an 8% annual return. Now, obviously, averages don’t matter to everybody because maybe you only care about the last two years, or three years, or whatever. But that 20-year period still shows positive gains in traction.

Where I think we have the greater, more important manipulation is the manipulation of signaling within the stock and bond markets, and it is done, particularly, in the bond market. You control the cost of capital. If you can control the cost of capital, and it is done, particularly, in the bond market. You control the cost of capital. If you can control the cost of capital, you increase the speculative tendencies within the market. People take more risk. You take away the governor, so to say, and allow people to do things they wouldn’t ordinarily do.

If you had to make a bet, but you were paying 10% as you go, or paying 5% as you go, that bet is going to be far more calculated than, “You’ve got free money. What are you going to do with it?” “Well, we’re just going to bet on just about anything.” So there is more risk in the market because of the manipulation of interest rates and you can see that in bond yields.

What is fascinating to me, and this is worth noting. I don’t think we have any questions on this, so I’ll just mention it here. We have seen an increase in interest rates over the last three to six months, and I don’t know if we have actually put in the lows here in 2019, but all of those negative rates and the tens of trillions of dollars that were negatively yielding, those rates are starting to come up.

Kevin: Is that the free market baring its little head?

David: Again, what kind of endurance do you have to continue to buy and buy and buy, and suppress and suppress and suppress? When you stop manipulating a market, then you have the revelation for real supply and real demand. And I think we are beginning to see that, to some degree, in the European bond markets, and that, actually, ties into the gold story because it is not that the bullion markets have been directly manipulated to the detriment of price. If you want to talk about a $5 manipulation or a $20 dollar manipulation, what have you – fine. But the greater manipulation is the manipulation of the mass mind which sees no reason to own gold because we live in a perfect world, and we’re dealing with the perfect set of monetary mandarins who are controlling outcomes in a positive way. There is no downside here.

And so, if you can convince people that there is no downside here, then there is also no reason to have that insurance component within a portfolio mandate. It’s a waste of money. People today would look at gold today and say, “Why would I allocate to gold when there is only upside in the market?” You, my friend, if that is your mindset, you have been manipulated. You are controlled, and your actions are contributing to the distortion in asset prices where gold may be lower than it could have been or ultimately well be, and stocks are higher than they can stay forever.

Kevin: This next question is from Nathan:

I’m an investor who is building my cash and metals position with the goal of being able to take a nice position in stocks the next time they “go on sale.” When that day comes, I wouldn’t mind buying individual stocks, but I’ve learned that you have to know how to read balance sheets, cash flow statements, etc., to make sure you’re not buying a lemon. Your MAPS products, McAlvany Wealth Management products, sound appealing, but last I checked I don’t have enough in assets to qualify. How would you recommend a small-time investor go about taking a position in stocks?

Why don’t you start there, Dave?

David: I think there are a couple of years before you really need to be considering a major move into equities. We haven’t seen any decline in equities. It takes some time for a bear market to wear on, and so keep this in mind. The first drop in a major market is not necessarily the place that you want to buy. You can go through long periods of time were there are low rates of return, or no reason for those shares to recover. So even if you bought them at an absolute low it still wasn’t quite time to buy.

Kevin: Can I tag on the last part of the question then, because he is asking then, when that times comes, if an ETF is appropriate. I could read the question, but that’s really what he is asking. ETFs are sort of a quasi-hybrid kind of an investment. What do you think, Dave?

David: Let me say this. I think, in terms of our MAPS strategies – it is an acronym that stands for Multiplier, Accumulator, Protector, and Strategic – those are portfolio styles and strategies which give a broad diversification to individual companies, not ETFs and not third-party asset managers, or whatever. So there is a limitation in terms of how much money it takes to effectively diversify a portfolio into individual asset allocation.

So I would say this. On the time horizon, Nathan, that you have and that I think is appropriate, our intention is to have mutual funds which represent the MAPS strategies where you could participate with $1,000, or $5,000, or $50,000, whatever the amount would be, and benefit from that diversification, but not with current limitations that we have in terms of account size. Product development is something we certainly have in mind as we are going forward to meet the needs of every investor, as we have done with Vaulted.

In Vaulted, if you have $10 and you want to do savings in gold and use that as an alternative bank account, we are not the kind of people who say, “We only take a million-dollar account.” No, I think we want to design the best quality products for everyone, and Vaulted is reliable savings for everyone.

Kevin: There is a $10 minimum on Vaulted I think, right?

David: Right. And MAPS, ultimately, will be reliable hard asset investing for everyone.

Kevin: This is a question from Warren:

Hi team. A recent conversation I heard with Art Berman and Chris Martensen (who, by the way, was a guest of ours in the past) brought up some very intriguing points regarding energy in our predicament. My question is under these points: One, solar isn’t keeping up with yearly increases in demand for energy. So we’re not really well off on our way to meaningful transitions away from fossil fuels. Two, humans are painfully slow to change and have a lot of faith in technology to solve their problem. Three, tight oil is the best of a bad bunch, most economically viable, but oil is generally a losing proposition. And this one blew me away. Four, renewables are lower density energy sources and don’t allow us to continue our system the way it is now. Long-term storage of energy remains a major problem, and it is essential to learn to live with less moving forward.

Here is the question: Would you agree that it would be wise to learn to live with less, given what we seem headed for in the long-term with systemic energy crunches in general? Art and Chris seem to see us headed for much higher energy crisis across the board. Thank you for your show.

David: There are some really good things that we could talk about here. I think I would start with the big picture, start with sort of macro, and then move to micro. At the macro level, if you have an energy issue, present tense or on the horizon, and there is no way to solve it at the macro level, that does not preclude there being small things that you, as an individual can do. When I looked at writing the book on legacy, one of the things that I was pointing out is, you have big picture issues and there are little things that you can do as an individual, owning your decisions, which impact your little, call it microclimate – your family, your community, your state. And I’m not sure if they ultimately serve the macro issues, but I know that when we look at macro issues, whether it is fiscal with our debt level over 23 trillion dollars, we got there one dollar at a time.

So it was micro, and now we’ve got an aggregate, a macro issue, and there is no way to solve the macro at the macro. At least, they haven’t proposed a policy that would help us with that in a healthy way yet. So my version, and why I tend to shrink back to what your personal choices are as a means of empowering you through, perhaps, a difficult challenge, or a challenging environment. It’s going to be a different conversation. I think this is very consistent with what Chris has talked about. I don’t know Art Berman or the conversation that they had, particularly, but I know Chris and we have talked before, as well as Adam, his colleague.

So what do I have in mind, in particular? Let’s look at the increase in fossil fuels and the impact that has for the system that we have as a whole. One of my best friends has solar on their house, and it is a decision that they made. As Chris said, and as you mentioned in your question, the renewables are a lower density energy source. Okay, so maybe solar is not a solution at the macro level. But I can tell you that in three years they haven’t had an energy bill. And it doesn’t matter what the cost of energy is for the next 10-15 years for them.

Kevin: My mom gets a check back every month.

David: And that’s the point, so I’m going to circle all the way back to one of the earliest questions we had last week. We were talking about taxes, and we were talking about moving from traditional IRAs to Roth IRAs. We oftentimes think about what we make and sometimes it is more important to think about what we keep. So taxes are a big issue. This energy issue and focusing on life that is more simple and ways of living that are more sustainable, and doing something like that, if you had solar on your house. My dad had solar on their house when they lived here in Colorado for 20 years. When the lights went out they were the only ones in the valley with the lights on (laughs).

But like your mom, there is this paycheck coming in because they are producing more energy than they need, which means that, again, maybe that doesn’t solve the macro level issues, but it does solve your issues, and it does insulate you from rising costs. So what you make and what you keep, I would say for anyone living on a fixed income, these are the kinds of things, these are problems you want to solve, because if you have a fixed income, or 20 years from now you plan on retiring, and you’re going to be on a fixed income, or arbitrarily set yourself on one because of what the income is you can generate from your assets, how do you cap costs? These are practical ways that you can do that.

Kevin: Dave, both of us have faced forest fires in this area and the possibility of having to evacuate at times. Something that really struck me, and I don’t know if this applies or not, but you think there is just a ton of things you are going to put in your car if your house may burn down, and we actually had room left over. We said let’s just take the essentials. We had been told to evacuate. We got the stuff in the car and we realized there is very little we really need. I was amazed. It was a great lesson at that time, that you can simplify.

David: Yes, an amazing exercise. We went through the same thing only about three years ago. Lightner Creek fires were raging and we were given a pre-evac, not an evacuation notice, but a pre-evac, and we just sat down with the kids and we said, “Look, we don’t know what happens here, but the things that you can’t replace. For my three-year-old at the time, he couldn’t imagine losing his beanie boos.

Kevin: I’m sure the Legos came, too. I know your kids.

David: But here’s the reality. You can replace those. So actually, they didn’t make it into the duffle bag. There was a reality that set in and they thought, “Oh, well, we can replace all that stuff.” So six people we stuffed into a small duffle bag – not the actual people, but their stuff.

Kevin: (laughs) That didn’t sound right, Dave.

David: It was not the body bag. So I guess I look at the question from Warren in two different ways. One, you can look at fossil fuels, you can look at energy from the standpoint of an investor, so what do higher prices mean? Higher energy costs means that those companies attached to them have greater resources to innovate, to find alternatives, to invest in new technology, to open up less feasible resources, where all of a sudden if oil is at $150 a barrel there are resources that you can tap that were not feasible until it was above $100 but are now profitable, and never were considered a part of a basis of resources.

So from an investment thesis you can look at it from that standpoint, then as an individual dealing with the consequences of higher prices which ultimately puts pressure on your personal sustainability. You can answer that question in a different way and I think there are some practical things that you can do.

Kevin: And you should. A lot of times people with good heart go out and buy the wrong investment at the wrong time thinking that this is the new trend, and it may not be but ten years from now, or more, before that actually takes form. This is from Lila Murphy. I love listening to Lila Murphy because she is looking that direction in her management of the investment, but she is also saying, not yet.

David: Yes, exactly. So for Art and Chris’s comments, if we are seeming to be heading toward higher energy prices across the board, there is an investment thesis to develop out of that. There is also a personal insulation thesis which should be developed out of that.

Kevin: Dave, this question is from Jake:

Kevin and David: I have been listening to you guys for years now, and I’m finally in that place where I have been unable to answer my own question. The question pertains to the term, Value, that we humans use. There a great many applications of use one can apply to it – subjective, objective, intrinsic, extrinsic, use, theoretical, personal, etc. The issue I have with it, in not being able to define value in an all-encompassing way, what is its final meaning?

David: Right. Let me just be clear here. Jake, you sent us an excellent question which spans four pages. We just edited it down.

Kevin: To three sentences, or four, I think.

David: Correct. So what I would do is, Jake, I would invite you out to Durango and we’ll sit and have a glass of Talisker and have the conversation that does justice to your question.

Kevin: I know you enjoyed reading the whole question and you did a lot of research.

David: I did, and I’ll also enjoy the Talisker with Jake. So Jake, anytime you’re passing through Durango, plan on that conversation. I think when you’re looking at the difficulty of divining it, whether it is the real, tangible intrinsic value, extrinsic value, subjective/objective, personal, there are different approaches to it. I think what you’re up against is, the word fits into a lot of different categories and can be used differently. So there is economic value, there is social value, there is mathematic value, there is philosophical value, and there are varieties of ways to define value, or use that term, within each of those fields.

Kevin: Isn’t this a meaning of life question? This may be the question, Dave, right here.

David: Yes, and even if you wanted to flip to the Oxford English Dictionary, it’s not something that is defined in one simple way. It is two-and-a-half pages, it’s 15 different definitions, and then you look at how it has been used differently.

Kevin: By the way, Jake, he’s got his big Oxford English Dictionary open right now as he is answering the question. This is one of how many volumes that you have?

David: This is the point, that there are 65,000 words in the English language. We typically don’t use but, say, 3000-5000. Value is one that has at least 15 definitions, and when I see 15 definitions to a word, I think to myself, even with 65,000 words to get very specific on meaning, we can’t get specific enough. So I’m not sure that there is an answer to your question, Jake, and a part of this, if we flipped to German we could take a word and add a prefix and a suffix to it and get closer to a concise and precise meaning. That is the beauty of German, is that you can get more out of the language. With 65,000 words to choose, at 15 definitions on this word it means there are actually not enough words for us to get to the heart of that meaning.

Kevin: But it is the right question. In other words, that shouldn’t discourage the question for every listener. What is value in your life?

David: We are talking about a variety of different things when we talk about gold having intrinsic value, or you want to argue that point and say, no, it’s on the basis of social consensus that we have it. Even that point is debatable when you say to yourself, yes, we have come to consensus after 5,000 years that gold, silver, platinum have intrinsic value. Okay, but let’s change the context. If we change the context and all of a sudden I can’t get food for my family, I care more about my neighbor’s chicken and trading for that than I do gold, and he may not care at all about my gold. It may have zero value in that context because something has greater value.

Kevin: Remember Adam Fergusson’s book, you brought it up. A grand piano was traded for a chicken because value changes, then, doesn’t it, by need?

David: I know there are personality types that will be driven crazy by this question, and also our exploration because it’s not exactly an answer, but it’s more of an exploration kind of conversation.

Kevin: Remember, we’re talking to a philosophy major, too. I always think that when you start defining something like value.

David: And you can define value, and the Oxford English Dictionary has 15 different ones.

Kevin: There you go.

David: So I guess we get back to the most important part, which is, Jake, when are you coming through town for a Talisker?

Kevin: Yes, and you would value that.

David: (laughs)

Kevin: And just to say, thank you very much, to our listeners, because speaking of value, I don’t think our listeners fully understand just how much we value the fact that they take the time every week, Dave, to listen to this commentary. Time. We’ve talked before, there are many things that we all have different multiples of, but we all have about the same amount of time, the same amount of heartbeats. I think I heard one time it’s two billion for most animals, whether it is a bee or whether it’s us, it’s about two billion heartbeats. I may be wrong on that, but we all have about that amount of time. And we have listeners who have listened for 11 years. Talk about value.

David: We appreciate that, and we hope that the conversation continues to bring insight, wisdom, affirmation, confirmation – bring something of value to you. We appreciate you very much.

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