EPISODES / WEEKLY COMMENTARY

Your Questions Answered Part 2

EPISODES / WEEKLY COMMENTARY
Weekly Commentary • Jan 05 2021
Your Questions Answered Part 2
David McAlvany Posted on January 5, 2021
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This week we answer your questions that were submitted. Thank you for listening to the McAlvany Weekly Commentary.

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Your Questions Answered Part 2
January 6, 2021

Kevin, it seems like an obvious compliment in the context of doing a Q&A to say that I appreciate our listeners’ curiosity, because we are deeply curious as individuals. And it’s an amazing experience to see life and to see the world from that vantage point of journeying together and trying to figure out the world that we live in and the best way to engage it in the context of curiosity, with life, with finances, with so many things.

–David McAlvany

Now, here are Kevin Orrick and David McAlvany.

Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany. Well, Happy New Year, Dave. We’re on our second week of the Question and Answer program, one of my favorite times of the year.

David: You know, back in the day, my dad would give a presentation and there would be people who would sit for four, five or six hours.

Kevin: [chuckle] That’s the truth, that’s the truth. Long.

David: I just don’t think that that would be the case anymore. So here we are, the second week of Questions and Answers, respecting your time and hoping that tuning in for a second week in less than marathon form, we hope you enjoy the second installment of the Q&A.

Kevin: Well, it sort of like the Lincoln-Douglas debates, back in the 1800s people had that kind of patience, eight hours at a time. Actually, listening to your dad, the time flew because he flew in four hours through what he called eight hours worth of material. So let’s go to the first question. One of the things that struck me, Dave, about these questions this time around, this year, almost all of them are assuming a weaker dollar and inflation, which… Yeah, that’s interesting. What a difference a year makes.

This next question brings back good memories. About five years ago, Dave, five years ago, we were in Argentina together, and man, what a great time. But the inflation rate… The inflation rate was, what? 40, 45% at the time. So obviously, people were having to adapt at that point to the very thing that we’re seeing the questions asked about today. So I’m going to read this next question. He says, “Gentlemen, a few years ago, you were both in Argentina. And my question, if we have serious inflation, then in Argentina, did real estate prices rise due to inflation, or did prices decline because interest rates increased?”

David: A couple of things I want to say… The trip to Argentina was very instructive. After that trip, I crossed the border to Uruguay. I spent several days looking for various places that I could buy physical assets, gold and silver, and had done the same in Buenos Aires, and found that generations have passed since gold and silver were a part of their monetary system, and no one really understood them at all. And it was fascinating to me because it was with some effort… It took me some effort to find an opt-out. And this plays into the question about Argentina real estate, because what we find is a whole generation or multiple generations that view the US dollar, at least in Argentina, as the equivalent of a gold standard, a better alternative than the local currency.

Now, to the question on real estate. In periods of high inflation, you have loan volumes which decrease significantly. There is no way for banks to hedge the kind of inflation risk that you see in those periods. And so imagine if Argentine banks were, for instance, using the equivalent of TIPS, Treasury Inflation-Protected Securities. We have those here in the United States, they don’t have those all over the world. But imagine an Argentine bank has the opportunity to invest in TIPS to hedge against currency devaluation, against inflation. The problem is the official inflation rate is stated lower than reality. And the official exchange rate diverges massively from the rate on the street. We’ve talked about that on the Commentary as the blue rate. The blue rate is the sort of black market rate, if you will.

And so you’ve got banks who are unable to hedge their inflation risk. Banks curtail lending to a large degree. And so all that is to say, interest rates are actually not the primary factor impacting demand in an environment like that. Real estate moves to cash transactions in periods of high inflation. And the demand for real estate in Argentina became basically a substitute for bank accounts. You buy a property… And look, even if you lost value on the property, that was better than sitting in cash and taking the annual 35% to 45% hit. I mean, process that for a minute. Would you rather risk 20%, 25% downside in your real estate, even 50% downside in your real estate, compared to sitting in cash and knowing that on an annual basis you were going to get tagged for one-third to half the value over and over and over again.

So a man that I knew would buy another apartment in Buenos Aries as frequently as his cash would build up from his business. And basically he would do anything he could to get into US dollars, but they’re restricted in terms of how much they can have in physical currency. Or he would take his trips to Uruguay over the weekends and take as much money out as he could and exchange it and keep it in Uruguay. And the rest there in Argentina was in real estate. So it’s just an interesting relationship that’s developed as a means of opting out.

Kevin: Well, Dave, we talked about the family element going well beyond your family to the company, but also to the listeners of the Commentary. I love how our listeners pay attention to the fact that we enjoy a scotch often together, and… So I’m going to go ahead and read this. It’s sort of eerie almost when we talk about these things because people come back and they go, “Oh yeah, we know quite a bit about you.” So listen to this.

He says, “Curious to hear your thoughts. If there’s a pivot point in the falling dollar index that will accelerate precious metals prices higher. What that pivot point is in the dollar index and what it would likely be, or is it more likely that the confidence is lost in another major world currency before the dollar?” He says, “Much appreciated from a long-time listener, Vaulted customer, recovering Iron Man…”  Does that sound familiar? “Fellow book salesman and Islay-loving neighbor.” Now, for those who don’t know, of course, I think he’s talking about scotch. So can you answer that question, Dave, please?

David: Absolutely. Well, so the Islay scotches are the ones that are the island scotches, characteristic for their peaty, smoky… I mean this is your Laphroaigs and Lagavulins and Ardbegs and Taliskers from the Island of Skye. And this is one of my many love languages.

[laughter]

I think… So to the latter part of the question, it is possible that we see confidence lost with another world currency. We continue to see games played and brinkmanship on display in Europe. So the euro is one of those any-day-could-fail type currencies, because it truly is a confidence game. They’re doing things that are, I think, outside of their legal allowance now with jointly shared debt. So they’re moving from a currency union to a fiscal union. And I don’t know that that’s something that they’ve necessarily approved. But anyways. I think the euro is one candidate for a major world currency that could see confidence lost. The RMB is another currency where today you’d say, “No, no, no.” And clearly China has a great future ahead of it. Well, sure, it may, but when we think of a future in the United States, we think of the next three, six, 12 months, and the Chinese, they think about the next 10 years, 20 years or 50 years.

So between here and there, you could see significant turmoil within the RMB. And something we do a lot… We talk a lot about in the Credit Bubble Bulletin, my colleague Doug Noland highlights the amount of credit excess there in China, and the fragility that that brings into play, not only for their financial system, but for their currency.

As it relates to the US dollar, we’ve already had it in terms of a pivot point. Gold’s up 24%, silver is up 45% this year. Looking at the dollar chart, the 92 level has been broken, the 91 level has been broken. Again, this is on the US dollar index. The next major support level, which if broken, would trigger significant buying, would be a break below 88 on the index. We’re two points from that now. And in case you’ve forgotten, we’ve been as high as 104 on the index this year, and we’re flirting with 88.

It’s been a rough ride for the dollar in 2020, which I think is one of the reasons why you’ve seen massive capital flows to the emerging markets. The emerging markets have been doing much better as the dollar is weak, so you see strength elsewhere. And you could say the opposite. If we see those trends reverse and dollar recovery, that would reignite pressure on emerging market currencies and bonds.

Kevin: Our next question refers to something called a monster box. And for those listeners who don’t know what a monster box is, in the industry, that’s a box of 500 Silver American Eagles. I have had clients who buy monster boxes of 500 Gold American Eagles, but they’re not quite as common a customer. But here’s the next question. It says, “There are some who speculate that a median single-family home could be purchased for a monster box of silver or two of the Silver Eagles in the next few years.” So Dave, could a monster box… Could 1000 ounces of silver, buy a median single-family home going forward? Is that reasonable?

David: Thinking about boxes from the Mint is really kind of fun. It reminds me of Christmas because you’ve got gold that comes in a red box and silver that comes in a green box, so I love those kinds of gifts and I’m always open to receiving them.

Kevin: I’m waiting for you to give me the gold box. You have 500 Gold Eagles, people can go ahead and do the math, at about $1900 dollar gold.

David: Yeah… So let’s start with gold, as we’re thinking about real estate and that interchange or exchange, if you will. We’ll start with gold because it’s less volatile than silver. And in the context of a significant market crisis, I think, it has a far more reliable pricing. There’s sometimes when silver just doesn’t do its job and will lag the price and performance of gold. And then, frankly, it’s in periods where there’s a rising concern with inflation that silver tends to outperform and clearly, this has been one of those years. So we can apply the ratio, the gold/silver ratio… We’ll apply that to gold to solve for the monster boxes in a minute. Today, you pay 157 ounces of gold for the median priced home. A median priced home is right around $291,000, $292,000.

So you’re right at about 157 ounces of gold for the median-priced home. A move to $3,000 an ounce, let’s just assume the price of the house doesn’t change at all but the price of gold does, moving upwards, a move to $3,000 an ounce drops the ounces that you need to 97 for a real estate purchase. And a move to $5,000 an ounce, again, all else being equal, drops the ounces required to 58. So we’re 157 today at under $2,000 an ounce, it costs 97 ounces, $3,000 an ounce, or 58 ounces at $5,000 an ounce.

So for silver, assuming the median price stays the same, at the current ratio of close to 70 to 1… That’s the current ratio. It’s about 72 actually at present. You need over 10,000 ounces of silver. And that’s 20 boxes, 20 boxes, those green boxes. If nothing but the ratio shifts, and we see the price of silver move higher, and we’re now at a 30 to 1 ratio, you’re at 800 ounces of silver or two boxes, down from 20. I’m not sure that that’s realistic. That would assume that gold is at $2,000 an ounce and silver’s at $363 an ounce. Again, not necessarily realistic in my opinion.

Go back to gold for a minute. What are my long-term expectations of gold? And I like to base it off of gold because I think it’s just more reliable as a hedge asset, as a store of wealth. It’s also a lot easier to store. One box of gold ounces has a lot more monetary value than what you would need from the silver side of things. My expectations for gold are that we see it trade to two times its inflation-adjusted price. The inflation adjusted price for gold is $2,700, multiply that times two, puts you just above $5,000 an ounce, $5,400 an ounce. That’s what I would consider the maximum justifiable price. And, again, I’m not talking about a radical re-pricing for super hyperinflation, but just what it could trade to on the basis of normal supply and demand, about twice the inflation-adjusted price, at around $5,400.

So take that number and assume we do move from 70 to 1, to 30 to 1. That’s a normal move. 30 on 1 on the gold/silver ratio, that puts you at $170 to $180 an ounce for silver. You could do the math differently at 15 to 1. I think that’s too aggressive, in my opinion. And I’ve seen a lot of people hold out for perfect numbers, and they’ve held out not just for years, but for decades. So holding out for a perfect number assumes a lot about market dynamics that we can’t know with certainty. So 30 to 1, I think, is a safer number to count on, and that’s again where I would assume, $170 to $180 an ounce.

Kevin: Okay, so let’s go ahead and look if there are changes to the real estate market, Dave, before you go on, because it’s fascinating to see how gold holds its buying power and how much more real estate it’s in the past purchased. I remember being with your father talking to one of my clients back in 2006, and this client had an enormous amount of real estate, it was leveraged, and your dad just shocked me… I almost fell over in 2006. He says, “Well, you need to sell it all, move to gold for a few years, and then move back in.” Well, this man, he knows who he is, he’s probably listening to the Commentary, he did. He did what your dad said. And he came back in in 2011, he went out of his gold and back into real estate, sold it back in 2006 and ’07, and he tripled… He tripled the amount of real estate he was able to hold for the same amount of money. And that’s that gold play. You remember that?

David: If I understood correctly, not only did he expand the amount of real estate that he owned, but he went from being in a leveraged real estate position to owning it free and clear. I could be wrong, but that’s how I remember.

Kevin: He sent us a card just reminding us that… This Christmas he sent a card just saying, “Hey, thank you.”

David: Well, so what if there are changes to the real estate market? We were assuming that the price stayed the same. If the median price stays the same, you’re talking about three to three and a half monster boxes. If prices of real estate decline by 25% in that same context, then you’re talking about two, two and a half boxes. And on the other side of the equation, let’s say that this is an inflation-oriented move, and we see the price of the average single-family home, the median price of a home, doubles from here. Then it would take you about seven boxes, seven boxes of silver. Okay? So I would… Today I would gladly finance a home purchase at 3% or less on a 30-year fixed rate mortgage. And at the same time, set aside five to seven boxes of Silver Eagles. And if silver prices move outside the 30 to 1 ratio, but… Look, those are even better numbers. You could buy a second home or keep the remaining silver for your grandkids and just tell them the story.

There is a reason to think about these kinds of exchanges. And the story that you just recounted, Kevin, is one of those. There’s a point to being somewhat agnostic as to the assets that you own. I’ve thought of it often in terms of filling multiple buckets, a cash bucket, a real estate bucket, a stock and bond bucket, a precious metals bucket, and you do that when it’s most opportunistic to do it. Avoid what is really expensive, and buy what is really cheap. And over time, at the end of your life, as you go from 20, 30, 40 years old, to 70, 80, 90, 100 years old, if you’ve done that well, you’ve filled all the buckets.

Kevin: You’ve got all the buckets. I’ve heard you use that often, and I love that because you don’t have to always be filling every bucket. Let me finish with the last part of Rick’s question. The same thought process on real estate. He says, “If you were a young married family renting a home, would you consider buying precious metals and continue renting rather than using that money for a down payment to borrow a huge amount of money to buy a home? Interest rates are low, but a mortgage payment relies on a job and job security. That seems unlikely also in the future.” So, Dave, this is a touchy question because sometimes you’re not going to say, “Stay in debt to own metals,” but what’s your thought on that? Because I know that you’ve actually practiced this question. You’ve put it into practice.

David: Yeah. Framed this way, a young married family renting a home, looking at buying precious metals, continuing renting or using that same money for a down payment and taking advantage of low interest rates. Job security is a big factor there. If you’re self-employed, it’s not to say that it’s any less risky, it might be more risky, but there are some control variables that you have. Whereas when you’re employed by someone else, you don’t have those same control variables. It’s not just a question of burning the candle at both ends to make it all come together. You may just, through no fault of your own, because of an economic downturn, end up with a pink slip.

So there is that aspect. Payments rely on job security. And so job security and reliable income, if that’s necessary to service debt, that’s a huge factor in the equation. The safer bet is to rent and convert metals to cash for a purchase in the future. Skip the financing all together and save, save in metals, and as and when the metals have appreciated sufficiently, you may be in a position to pay cash for the house. Bear in mind that as we talked about interest rates earlier in that question relating to Argentina, it’s quite common when you have inflation, interest rates follow to the upside. Interest rates moving to the upside limit what people can pay for a home from the standpoint of cash flow. And the higher interest rates go, the more advantages accrue to the cash buyer. So for someone who’s saving in ounces and is going to be this next cycle’s cash buyer in real estate, you’re doing that without taking a lot of risk.

Now… I’ll grant you, there’s a price to pay for renting, both in terms of the money that just goes down the drain, but also in terms of the family dynamics, having a place that’s not your own, that you’re not going to be permanently. And those are obviously things to factor in. My wife and I rented for seven years and saved like Banshees. We determined that saving 50% of our income was going to be our minimum target. And starting in 2003, we did that. We rented for seven years, bought a house when the market turned down in 2008 and 2009, and did it out of significant gold and silver savings. So, there is a similar scenario here… There is a similar scenario here. I would say if job security and reliable income are not something that you can fully account for, then renting and converting metals to cash for your purchase, again, skipping that financing all together, that’s probably the better choice.

Kevin: Okay, next question. “Gentlemen, I always enjoy your show and appreciate the continuing education. With the intersection of the 80 to 100-year super debt cycle, along with the roughly 50-year monetary reserve change, which we’ve had a global purely fiat system in place,”… That’s a record amount of time, by the way. “Unprecedented has become a cliché in 2020, but I feel like one must be open to all possibilities generally, but particularly since we are in such uncharted territory. Granted, we are experiencing extreme Fed stimulus along with fiscal stimulus. Nevertheless, I get this eerie feeling that we could see another decade like the last where gold spikes until, in essence, massive monetary printing stabilizes the markets and then it drops precipitously, kicking the can down the road. What are your thoughts on such a scenario and how would you reposition your portfolio under this scenario? Condensing my diatribe,” he says, “Knowing what you know now, how would you change your portfolio allocation in the event the 2020s become a repeat of the 2010s?” So Adrian asks, Dave, a question that we’ve asked, what the heck happened these last 10 years? And can we do it again?

David: Yeah, there’s some personal reflection in there. There’s some reflections as an asset manager and sort of the team and the disciplines that we employ now. Let me start by saying we shouldn’t be surprised by the debt super-cycle being pressed to previously unimaginable levels. It’s exaggerated by limitless money printing in, what Adrian points out, is a first-ever experiment in the sense that we have a globally accepted fiat money system. So, we’re playing with a money system that’s never been pushed to these limits before, and we’re also playing with a credit system on the other side of that, which has never been pushed to these limits before. So no surprise there. I think, like any relationship that requires trust and confidence, it works with those elements present and it fails in their absence.

So, if the system requires trust and confidence and those things fade in the least, then it’ll all come down quickly. So, abuse of a system, the abuse of trust, and there are consequences. The monetary system is no different there. So, when we think of the next 10 years, it’s with the previous liberties taken in the past 10 that we have to ask the question. And what tolerances are there for more of the same? In this sense, what causes sentiment to shift? What causes trust to reach a break point? We could also look at this in theory and say, “If we had the exact same policies, if we had the exact same market responses, how would I change allocations?” And so if they remained constant, and there was not, as I suggested just a minute ago, a consequence to liberties taken, a failing of trust and confidence. If we get 10 years exactly like the last 10 that we had, how would I change allocations?

One of the most important things, I think, I would do is remove timing as a critical element. So, I think the easiest way of illustrating this is to think about the options market, where you have to have not only the trend of the asset, but the timing impeccable. And if you miss on the timing, it doesn’t matter how right you were on the trend. So, if you’ve structured a portfolio in any way that has a timing element to it, and you’re not sure what the next 10 years holds, I think you could find yourself in trouble. The second thing I think I would do is… Is I would shrink position sizes. I would have adequate exposures to the areas where I wanted exposure, but not excessive positions. I think the third thing I would do is balance exposures to a more all-weather approach.

The tendency I see amongst investors is to come to a hard conclusion about what seems most reasonable to them, and then place an all-in bet on that outcome. Not having accounted for the possibility that they’re wrong or they’ve missed an element or that there’s some nuance that would change the outcome and thus put them at a disadvantage in terms of the positions that they’ve taken. So, balancing exposures to a more all-weather approach includes saying, “I could be right. I think I’m right. But in case I’m not, I have a variety of other exposures in the portfolio.” So, I think one more thing I would do is I would manage… And this is really thinking back to 2013 and ’14, a personal reflection on this one. I would manage risk according to both fundamentals and performance.

And this was a critical mistake for me in 2013 and ’14, when the fundamentals remained the same, but performance shifted. And you could see it in the European debt markets, you could see it in the US economy. There was no economic recovery through that period of time, and yet prices were shifting, even though fundamentals remained consistently negative. So, that was a huge lesson for me that I will never forget the rest of my investing life, is a matching of fundamentals and performance. These are areas that we’ve refined amongst many others, but we’ve refined to have a process that allows for, in the current context, making hay. If the sun is shining, we will make hay. But also including protocols which promote risk minimization in the event that it rains. So, make hay while the sun shines, but have an umbrella in case it rains.

Kevin: This is really interesting listening to this, Dave, because what this is is, this is going back and saying, “Alright, what would I have changed over the last decade?” Even though we’re looking forward, the question, just as a reminder to the listeners, this question is, what if they can keep this whole thing going like they did the last decade with the printing of money? But knowing what you know now, one of the things that’s very difficult for you to admit, Dave, and me to admit, and any of us who look back at history to see how to invest, is that those fundamentals really didn’t work most of the time when the Fed had unlimited availability of money. So, knowing what you know now, would you discount reason, logic, fundamentals, history? That’s my question because, boy, is that hard to say.

David: Yeah. And I think all those aspects are very valuable, but I would discount them. I would discount reason, I would discount logic, I would discount fundamentals because they’re not adequate in and of themselves. Add to that respect for price action, add to that humility as a cornerstone for the next decade, regardless of how it unfolds. I think that will be one thing that I carry with me, because I’m certain of one thing at this point, that I have only part of the picture in focus. So, we talked about what I would change. What would remain the same is a core position in precious metals. That would not change for me. Being able to trade the ratios… I prefer to increase ounces, not by exiting and re-entering the metals, but by having the hard asset exposure and playing the differences in metals prices intra-market. It’s a better approach. It’s a better approach to the metals and it allows me… We talk about our perspective triangle and how the base of that triangle is in what we call insurance.

In actuality, that is the job description of the metals themselves. But I would maintain that insurance regardless of the pricing dynamics, knowing that there are ways… And this is one of the means our staff has of delivering value, which frankly our competition has never been able to touch. These are skills honed over five decades, through five decades of experience, and it’s an area where we can add a lot of value. Where metals are more of a permanent fixture in a portfolio, how do they continue to deliver value year in and year out? And again, I think our competition is left with price as the only means of differentiation. And frankly, there’s not much of that in the age of the internet. So, I’m proud to say, I think the folks that I work with, you included, Kevin, stand head and shoulders above anyone else in the metals field because of that. I think it’s important to bear in mind that really only four of the last 10 years were challenging. And particularly, I’m thinking of the higher beta commodity stocks, 2012 to 2015 were brutal for the precious metals miners. Would I do that period differently? Sure.

Anything with exaggerated volatility would be reduced, companies connected to the metals would be jettisoned faster. Again, combining those fundamentals with price performance, where performance and fundamentals get blended into a reason to be either increasing or decreasing position exposure. Bear in mind, prior to that, up to 2012, and after that, 2016 to the present, you’ve had some very compelling growth years. So, you’re really in the last decade, as the question is asked, there’s really only a carve-out of about four years where things have operated in a very funny way. Where, again, fundamentals have disconnected from reality. And now, of course, we have credit excess driving stock prices completely bonkers, but that’s nothing we haven’t seen in the past. We saw that in the 2008-2009 timeframe, just before the top there in the fall of 2008. And of course, we’ve seen it in previous cycles, ’99, 2000, etcetera.

But if I step back from positions, if I step back from process, if I step back from portfolio critique, I would say that the policies employed work because they did work. I mean, I don’t want this to sound confusing, but that is different than having a policy that predictably works time and time again. It’s like one crapshoot and a win doesn’t necessarily define a trend or a pattern. Just because it worked doesn’t mean that we do this over the next 10 years and we get the same results. In that last case, you had the interventionist measures which were sufficient, and you also had the right combination of social and psychological conditions which were supportive. And those are the dynamics that are not constant, the sociological and psychological aspects within the marketplace. So, I have a hard time believing that you would get the same market reactions and price movements if we repeated the same policy responses to stressful circumstances in another round of crisis and policy response.

Kevin: I just want to thank the person who asked that question because, Dave, you have a lot of experience now and a lot of pain. And I think of our friend, a mutual friend who owns the library of mistakes, and probably the most valuable thing you can ask someone who’s been through experience, like Jim Deeds… Jim Deeds is one. You can say, “Tell me what you would have done different. What did you learn? What went wrong?” And you make a great point, too, Dave, that just because something does work doesn’t mean it’s the right way and that it’ll work every time. And we all know, in various aspects of our life… We talk about flying airplanes, you can do things that shortcut some of the procedures, and you can get away with that for a little while. But in the long run, it will catch up.

Well, going on to our next listener… And I love the listeners who go and read the books we talk about, Dave. One of our favorites is, When Money Dies. So here’s the question from Richard. He says, “I read the book When Money Dies 10 years ago, and I’ve noted your consistent mentions in several weekly commentaries of a possible dollar devaluation/inflationary event in the United States in 2021. Please tell us how to be smart with a home mortgage during such an event, the things to watch for. Right now, I can pay off my entire mortgage with the gold I have, but I’ve been holding off. My family is also well positioned in silver. And we’ve been listening to your weekly commentary for over a decade. Thank you for your insights. Richard, in California.”

David: I would say stick with the program of paying off the mortgage with current income, and every time you have a push higher in commodity price, gold and silver, you’re scratching your head and you’re wondering if it can possibly go further, sell a few ounces and make an extra principal payment or multiple principal payments. Now is not the ideal time, and I only say that because should the metals price move higher, you’ll look back and you’ll say, “Well, it wasn’t an ideal time.” But the reality is you never know what the ideal time was. You never know what a peak is until after the fact, until the peak has been put in. And then it may be too late to exit your gold ounces and pay off the mortgage. So, I think this is just an opportunity to operate incrementally and in a disciplined fashion. Years ago, I bought enough gold to pay off my mortgage, personally. As prices have risen from 2009 to the present, the year we bought our house, the debt has in essence been discounted, it takes less ounces to pay off the same debt. And it never hurts to accelerate your debt liquidation as the asset grows incrementally.

And that is the key. If you’re looking for the perfect time and the perfect exit from the metals to pay off the mortgage, I find an all or nothing approach leaves you with far more burdened decision-making. And so to keep the decision-making from becoming burdensome, I would keep it incremental and keep it disciplined.

Kevin: Our next question comes from Luke, and I love this. Dave, he goes all the way back to 2008 when we started. He says, “Question for the Q&A weekly commentary. I’m a long time listener since October 2008, and owner of David’s book, Intentional Legacy. Question. What drove interest rates to 17% in [1982]? What drove gold to over $800 in 1980? Two swings of the same pendulum that may provide some insights on where extreme swings in the same pendulum could take over the next four years. Best regards.” So yeah… So we went back and we looked at the decade from 2010 to 2020, what would we do different? Now, what we’re doing is we’re going back and we’re looking at the decade of really 1972-ish to 1981 or ’82. So, what are your thoughts? What drove interest rates to 17% and gold to $800 back then?

David: Well, simply Volker. Volker had the backbone of a Winston Churchill, the personality of a Winston Churchill. He was very brash. He didn’t take muss and fuss from anybody, and he was willing to create a recession to tame inflation, which of course carried with it a huge amount of political pressure. So, he did something incredibly unpopular. He took interest rates, lifted rates to the highest level seen in US history, and the object was to kill inflation, the object was to further stabilize the dollar. And we had interest rates which peaked in 1982, gold had risen to $800 by 1980, in part due to the debt monetization schemes employed in the ’70s, and in part reflecting the Guns and Butter policies of the 1960s.

So, that was already baked into the cake. Then when the Russians invaded Afghanistan in 1979, it took gold six weeks to double from $400 to $800 an ounce. That was the peak, that was the peak in price, and that was the peak in concerns, both political and economic, converging. And really, it’s geopolitical and economic converging to drive prices to what at that point was two times the inflation-adjusted price. The inflation-adjusted price was $400 times two takes you to $800. Interest rates went to those levels because Volker wanted them to. And so the difference between then and now is that no policymaker would do that today, given the quantity of debt now in the system. It would not be a recession that they triggered like the one Volker’s blamed for, but an outright depression.

The ramifications of that, no policymaker has the backbone for today. So, part of this is predicated off of personality, part of it is predicated off of the change in the quantity of debt that we have, the total quantity as well as the quantity compared to our economy. And what we see today is the Fed and the Treasury working in concert this time to keep interest rates excessively low in order to accommodate economic growth, economic growth which is now entirely dependent on credit growth. And I think if we see any surprise in the area of interest rates, the surprise is going to be from the markets stepping in and ripping the reins from the hands of the central planners, and specifically the policymakers at the Fed and the Treasury. And the surprise is going to be when the market asserts greater control of rates and rates rise, not when the Fed or Treasury give them permission to, but when the Fed and Treasury have lost all credibility.

And so there were some differences this time around. Again, Volker was the orchestrator of a rise in rates to kill the inflation that we had in the 1970s. And so those dynamics are a little bit different at present. Politicians have a hard time bringing in people like Volker who do what they think is best, regardless of the short-term political consequences. Let’s try that one on for size in this environment. And I can hear some of our listeners saying, “Credibility, what credibility? The Fed and the Treasury, they’ve lost their credibility over the last several years.” What I’m referencing there is the ranks of investors and concerned citizens who today hold the view that they’ve lost that credibility. It’s a minority, and you’re going to need to see the ranks of investors and concerned citizens grow for the markets to overpower the powers that be.

Kevin: That last question, the one you’re answering right now, was from someone who’s listened to the commentary, literally, all the years that we’ve been doing it. We started back in 2008. And I had always wished that we had a fly on the wall when we would have company meetings and the interaction that was going on and the decades of experience that we’re talking. I was like, “Gosh, what a waste. What a waste that we’re not able to share this with more people.” And then of course, the commentary came out in 2008. But, Dave, this next and last question, I’ve got to admit is one of my favorites because it’s not the question itself that’s a favorite. It’s a good question, but who would have thought back in 2008 when we started recording this commentary, that it would become sort of a couple’s activity every week. That married couples would get together and listen to the latest commentary. Let me go ahead and read this to you, Dave. It says, “Hi, David and Kevin. My wife and I have been listening for years. I always appreciate your perspective and humor. My wife calls our Wednesday nights the McAlvany back rub night, since it was my way to introduce her to the world of finance and listen to the commentary.”

I love that. I love that. So, okay, here’s the question. “I have a few boxes of Silver Eagles purchased at $19 an ounce, and I want to add to my IRA. I was going to wait until the gold and silver ratio was between 40 or 50 to one and swap for gold, but at some point, the taxes could be brutal.” He says, “Thanks for sharing your lives with us and may your souls continue to prosper in 2021.” Do you have a suggestion on the tax side of things, Dave?

David: A couple of things come to mind. A good friend of ours in Mexico City, a corporate headhunter, he and his wife on Friday nights, it’s not Wednesday nights, but it’s popcorn and a nice bottle of wine, and it’s time for commentary, 30, 45 minutes, whatever. And I read this question to my wife and it made her smile. She’s like, “Well, why aren’t Wednesday nights McAlvany back rub night around here?”

[laughter]

Yeah, a couple of things come to mind. Thank you, Mike and Sarah, for the inspiration there. So, I think you’re looking at the use of traditional versus Roth IRAs. This is something to think about. When you have the opportunity, converting a traditional to a Roth IRA is a good idea. Explore that possibility, see if it is an option. And there is a huge advantage to having a part of your precious metals holdings in a tax-deferred structure. That could be a traditional or a Roth, but what it allows you to do is take full advantage of the gold/silver ratio, and you’re not obligated within those structures, of course, to pay capital gains taxes as you go. So, you can really see some huge benefits as you allow those ratios to work for you, and you’re not carving out 20%, 30% and sending that off to Uncle Sam.

So, taxes can be brutal if you’re looking at those swaps, which is one of the reasons why the tax-deferred vehicle is so critical in the overall equation. I would stick with the ratio. 40 to 50 to 1 is a modest ratio, that’s a pretty consistent mid-point. Between 100 and 15, those are your sort of extreme numbers. This year, we set a new extreme at 125 on the upside, 15… This goes back to the Hunt Brothers days, it’s not exactly something that’s very predictable, 30 is much more predictable. And as you tighten the range on the gold/silver ratio, it becomes something that can be more frequently traded. Smaller swings, less dramatic increases in ounces, but more predictable. So, 40 to 50 is very reasonable, 30 is an excellent point to be moving from silver back to gold. And again, if you can do that in the context of an IRA, by all means, do.

Kevin: Dave, within the IRA, of course, the swaps between gold and silver or platinum and palladium can be done without worrying about the taxes. But even outside of an IRA, the gold/silver swaps, when they reach their extremes, even that 28% tax that’s paid on the gains doesn’t really add up to much. We always calculate that before making a recommendation to a client, but a lot of our compound ounce moves, even with the tax ramifications, can be very, very helpful.

David: Yeah, I guess going back to the way you describe things often, Kevin, in terms of a flying analogy. If you can increase lift and decrease drag at any point in your investment cycle, personally, from the time you start saving at 20, 30, 40 years old, up until you’re in your 70s, 80s, 90s, whatever, increase lift, decrease drag. The reason why you would employ the retirement structure or the tax-deferred structure is to do that. It’s effective without it, it’s just more effective with it.

Kevin: Well, I love the questions. The last two weeks have just been… It feels like a conversation with the people who are listening to the commentary, Dave. And I know we get that in other ways. We talk to our clients on the phone and we’ve got conferences where we can meet the people, but I love to hear the way people are thinking and listening. So, I just want to thank all the listeners for your loyalty. There’s a real time commitment to listening to any podcast or commentary or broadcast, and we just really appreciate those who’ve been loyal listeners for a long time.

David: Kevin, it seems like an obvious compliment in the context of doing a Q&A to say that I appreciate our listeners’ curiosity, but more than the questions submitted is, as you mentioned just a moment ago, their commitment to joining us every week and engaging to learn and to grow. That’s the process that we’ve engaged with because we are deeply curious as individuals. And when we get to be on the phone and talking with our listeners, some of whom become clients, it’s an amazing experience to see life and to see the world from that vantage point of journeying together and trying to figure out the world that we live in and the best way to engage it. And it’s just… I appreciate that sense of camaraderie in the context of curiosity with life, with finances, with so many things.

Kevin: Intentional legacy truly is a shared experience.

You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany, and you can find us at mcalvany.com. M-C-A-L-V-A-N-Y.com. And you can always 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.

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