Central Banks Purchase Record 400 Tons of Gold

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• Powell pops the pivot presumption
• Midterms & CPI numbers this week
• Will the dollar fall & gold rise? Technicals are hinting yes

Central Banks Purchase Record 400 Tons of Gold
November 9, 2022

“When you think about gold being at $5,000, that’s 2.9, almost three times higher than current prices. Some people say that’s not even reasonable. Now, actually, it’s not unreasonable. If we revisit the earlier comments on sticky inflation, if we look at the structural factors of deglobalization and geopolitical disarray, they suggest that a basic three times move in gold to peak levels is quite defensible.” — David McAlvany

Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany. 

The year 1896, Charles Dow, Ed Jones, editors of the Wall Street Journal, came up with the Dow Jones Industrial Average. At the time, it was worth one ounce of gold, $20. Over the next few years, couple of decades until 1929, the Dow rose to 20 ounces of gold. And then there was the reversal that actually is reminding me of where we are today.

David: That’s right. So, you get an index, which was once 10 companies, now 30, and it was a proxy for the markets. Still is. You’re right. As things continue to grow in post-World War I period, we got through the Roaring Twenties to the market peak in 1929.

Kevin: That fateful year.

David: You could exchange your shares in the short list of companies for a few ounces of gold. In fact, it was about 19 ounces of gold, 18 and change. Then the market crashed. Stocks went into free fall. Gold obviously is a security, and people clamoring for what at that point was still just cash really. Moving to cash was moving into gold. It goes from an 18 or 19 to 1 ratio down to 1 to 1. One to one was the ratio. The Dow Jones Industrial Average had the same value as one ounce of gold.

Kevin: Could that happen again? Because we’re at 19 to 1 now, aren’t we?

David: We are. We’re 19.3 as of this morning, and we’ve been as high as 43 to 1 going back to the year 2000, but here we are at close to 20 to 1.

Kevin: You wonder when that happens, and it’s not going to happen overnight, but I think of the tantrum that occurred a few years ago when the market expects one thing and gets another. This week, we saw the same type of thing, didn’t we? There was elation after Powell talked.

David: For about 20 minutes.

Kevin: And then Powell gave an interview afterwards and he just poured water on it, didn’t he?

David: Party pooper. Well, his decision to raise rates 75 basis points was not a surprise, but his assertive stance in the Q&A afterwards signaled to the market that a pivot to looser policy was not to be expected anytime soon.

Kevin: There’s your tantrum.

David: Tantrums ensued, which may have marked the end of a very short and sharp rally. Time will tell, but it’s very interesting because we got very bearish very quickly. And then all of a sudden, as we head into this week, it’s not so bearish. We look at a variety of indicators suggesting that pressure, the internal credit market pressures are actually not on the boil. So, we’ve got an election, significant data releases this week. So, actually, a bit of confusion in terms of discerning the short term trends. That can be a challenge.

Kevin: We have a tendency sometimes to look at the nominal rate, what we see in numbers, but actually the real rate of interest, negative or positive, is more important, isn’t it?

David: As much progress as Powell has made with lifting rates, most recently in 75 basis point increments, in real terms, the target rate has only gone from -5.25% one year ago to -4.25% today.

Kevin: So, that’s negative to the inflation rate basically.

David: A real rate, you just have to factor in inflation. So, for all the lifting of rates that we’ve seen, in real terms, once you factor in inflation, virtually nothing has changed from a year ago. Five and a quarter percent negative is where we were one year ago. Four and a quarter percent negative is where we’re at today. You got to let that sink in.

Kevin: Yeah, he wants to get it positive. How in the world do you get it positive?

David: Well, his hawkish comments are warranted so long as inflation levels are elevated and real yields stay deeply negative, but to quote from his after party comments, we’ll want to get the policy rate to a level where the real interest rate is positive. 

Kevin, it’s not to say that rates are going to go higher by another 4.25%. That’s not what I’m saying. The hope is from Powell’s perspective, from the Fed’s perspective, and from our perspective, that interest rates do move a little higher and inflation comes down so they meet in the middle. Lower inflation, marginally higher interest rates to close that 4.25% gap. So, raising rates to a terminal level of say 5%, 5.5%, that’s going to get the job done. Current consensus is somewhere between 4 and 4.7%, and that’s considered an outside number, but I honestly think that moving above 5 is what will have to be the case. I think structural factors have and will keep inflation elevated more than the Fed thinks they will be, and not near the double digits. I’m not talking about that, but high enough for the Fed to keep gradually searching for an effective demand killer.

Kevin: So, without him actually saying it, he’s trying to create a recession because you have to slow the economy down enough to where inflation stops ruining this meeting in the middle mark that you’re talking about.

David: Yeah, demand control is what they’re talking about, supply and demand control. They view this as a part of their function. Recession is the goal. You can’t forget that. He said in last week’s comments in the United States, we have a demand issue. We’ve got an imbalance between demand and supply, which you see in many parts of the economy. So, our tools are well suited on that problem and that’s what we’re doing. Those were his words, not mine. What I think is that supply-demand analysis is missing something. What it’s missing is de-globalization on the one hand and geopolitical instability on the other.

Kevin: He never mentioned either one of those, did he?

David: No. These are factors which influence inflation and are not resolvable with monetary policy tools. Ergo, inflation of a sort will be tamed, but only in part.

Kevin: So, there’s hope against hope, though, in the equity and the bond markets. That’s what most people hold in their 401Ks. They’re hoping for a pivot before that time happens.

David: Well, equity and bond markets, yeah, you’re right. We’re talking about every 60/40 investor out there. Looking for that about-face, looking for a resumption of lower rates, this is going to be tough to come by except on a very short-term basis, which I’ll get to in a minute. There’s no doubt that rates and inflation are going to continue to gyrate. You would expect bond yields to drop a bit after two years of screaming higher. You look at the charts. It’s really astounding how much ground we’ve covered in such a short period of time. We’ve also argued previously that inflation is something that will have to moderate temporarily and then resume again. It’s not as if you have inflation and you don’t have inflation. It’s that you have a lot and then a little and then a lot and then a little, and you’re working it out of the system. It takes time and you will have a start and stop type thing going on.

Kevin: Do you think we’re going to get back to those low rates that we saw in the Treasurys though? I mean 99 basis points.

David: Odds are we do not. Even if we see a down trend in rates and a down trend in inflation, there’s no way we’re going back to that because it’s not normal. It never was normal.

Kevin: It was artificial.

David: No, in fact, you’re talking about levels that had not been seen in 4,000 years of interest rate history. So, a 30-year Treasury, again, this is revisiting March 2020 levels at 99 basis points or the 10-year Treasury, revisiting August 2020 levels, 52 basis points, that’s a half a percent. Getting to those levels, chances are very, very remote indeed. It’s likely that those were the lows for a generation or two or three.

Kevin: Well, sometimes you see a play in the bond market in a different area. You often will bring up junk bonds and you remember the time when junk bonds were yielding hardly any more than Treasurys. There was a point where it didn’t make any sense. Greek, Spanish, junk bonds, here, everything was low rate because of that artificial interest rate, but now we’re starting to see money coming back into junk bonds with the play that maybe interest rates will reverse.

David: Yeah, I think the complexity that we have in the bond market going from 2022 into next year, 2023, is that 2022 is largely about rates, interest rate increases. So, there’s volatility in the bond market and in the fixed income markets because of a change in rate structure. That had nothing to do with credit quality. 2023, that’s the story for 2023 is a shift from just a focus on interest rate volatility to quality of credit impacting pricing of particular segments of bonds. We look at junk bonds, and the inflows continue to increase there with speculators playing for a rally in the credit markets. What does that look like? It means yields coming down, prices going up. So, they’re betting on rates that way. My guess is that they’re right in the short run. This is going to happen.

Kevin: Because they haven’t seen the credit quality impairment. Chinese— In China they can no longer play the rates. It’s the credit quality that’s showing up now.

David: That’s right. That’s happened there. It’s happened in other geographies, but here in the US, looking at the long bond, the volatilities had to do with duration and a change in interest rates. It has had nothing to do with credit quality. It’s not a reflection of potential demise, but there’s a degree of obliviousness, it seems to me, with these traders who are stepping in for a change in rates. The next phase of decline, where fixed income volatility extends beyond central bank rate choices and is tied more to credit quality impairment, that doesn’t seem to be in the minds of fixed income investors today. I think that’s going to unfold, more likely in the context of 2023 and a recessionary dynamic. The lag between higher rates and its economic impact, not just in financial market repricing, but there being a real economic impact, that’s probably out to Q2, Q3 of next year. Think about it, March 17th, 2022 is the initial rate liftoff.

Kevin: It’s not even a year and we’re talking nine months.

David: That’s right. You’re talking about a progressive tightening of financial conditions that gets filtered through the economy over time. Bonds have already felt it to a degree. Just watching issuance, watching how easy it is for Wall Street to pump stuff into the financial system, but bank lending has hardly been touched, right? So, we’ve got small businesses, medium sized businesses, loans specifically from banks have been surprisingly brisk, the pace of loans there if you look through the quarterly numbers on bank credit growth. When banks get a little bit more restrictive, you’ll know we are in the recession and not on the edge of one. That is a really interesting contrast, I think. This contrast between the bond deals, which have already had some impairment, very sensitive to interest rates— The stress is obviously apparent on Wall Street next to bank lending, which hasn’t showed much stress at all to date.

Kevin: Dave, there is a delay. You’re talking about the time delay maybe into quarter two or quarter three of next year of what’s actually happened here, but the markets also discount in this week’s news. I mean, this is a week of big news. We’ve got the midterm elections. We’ve got the CPI number coming out here right after we publish the show, but there doesn’t seem to be a lot of market anxiety based on the fact that we have these big news events this week. What’s with that?

David: You’re right. We’ve got the midterms. We’ve got CPI, the number for October. We have other data, small business optimism, mortgage apps, consumer credit, but there’s not a lot of market anxiety around the midterms. Your real average earnings will also be out this week as a data point, and I think this is where the rubber meets the road as it relates to the election. Many have expected a significant political reshuffle this week. This goes back to Clinton’s favorite James Carville quote. This is from the ’90s.

Kevin: It’s the economy, stupid. Remember that? Yeah.

David: Right? You can change an election with the right quip and this is what has caught up in this particular timeframe. Again, this is before the election. We don’t know any outcomes.

Kevin: Yeah, but the White House is bragging that it raised social security more than anyone else.

David: Well, real wages get to the heart of that quote. It’s the economy, stupid. Because the economy’s actually not in a bad place. Wages have been on the rise.

Kevin: Yeah, but not to keep up with inflation.

David: Not enough. That translates to Middle America being frustrated. So, the painful lesson, funny from my point of view.

Kevin: Something you don’t brag on from the White House, right?

David: Yeah. Last week when they took credit for the biggest rise in social security payments in decades, only to pull the quote minutes later after realizing that voters get it. Voters understand, maybe even better than they do, that the COLA, the cost of living adjustment, is an inflation proxy and that translated very poorly to the hoi polloi.

Kevin: Yeah, don’t brag about that.

David: No, no, no, no. The White House taking credit for the largest increase in inflation in decades doesn’t help the cause coming into the midterms when that’s the part of the economy, stupid, which is the difficult part for the Democrats this time around.

Kevin: Okay, so what do we expect if there’s a red wave? I mean from the markets, do the markets expect to get a boost?

David: Doug’s take coming into the week—this is our colleague Doug Noland—was that expectations are for a stock market rally in the event of a Republican wave. Bond and currency market reactions could prove more consequential, and I think that’s a key point, Kevin, is we’ve got to watch various currents here. The bond and currency market reactions are something to keep in mind. He goes on to say that if the anticipated bond rally fails to materialize on positive Republican outcomes, I would expect the bond bear market to gain additional momentum. A post-election dollar rally could prove problematic for vulnerable global currencies, including the renminbi, yen, pound, and euro. Surging yields coupled with currency market instability would pose a challenge for global markets, including US equities. If the election holds no surprises and the market’s social stability remains calm, that would create a favorable backdrop for the resumption of the equities rally. With not that many weeks remaining in 2022, it wouldn’t take much to evoke year-end rally dynamics. Then Doug comes back around to his comments on the bond and currency markets again. He says, “So long as bond yields continue to rise, I would tend to see limited stock market upside. A bond rally would make me nervous. It would take some positive inflation news between the midterms and Thursday CPI data, it seems poised to be an interesting and impactful week.”

Kevin: As you know, we look at fundamentals mainly, but often times technical analysis is just a cold, calculating way to look at things without taking the news into consideration. What does technical analysis show right now?

David: What’s nice about technical analysis is it focuses on price action.

Kevin: Just charts. Just charts and numbers.

David: There’s a part of it that is, I think, not as reliable as fundamental information. On the other hand, there’s a part of it that’s even more reliable. So, the data this week is going to further influence markets as investors try to read the Fed tea leaves. Coming into year end, we’ve got the inflation number, which we just talked about, and there’s going to be a variety of extrapolations derived from the inflation number in terms of what the Fed will do in light of that, more or less aggressive. From a different perspective, technical analysis brings in a dispassionate view. This week, wow, that’s an important thing. In the age of ruthless prejudgment and political presumption, it brings in, I think, a very helpful perspective.

Kevin: You can’t really talk the technicals, can you? I mean if you’re wanting to talk the fundamentals, that’s what we’ve seen with central bankers and politicians, especially for the last decade. Okay. So, we all want to know, I mean has gold put in a bottom, the US dollar put in a top? Energy markets. Again, cold calculated analysis, what do the charts say right now, Dave? The charts.

David: Well, I mean this is the challenge of technical analysis because you can see it, but you don’t necessarily know what it’s telling you about the future. You can extrapolate from past trends and get a good idea in terms of pricing dynamics and momentum indications about what is developing, but there is a degree of extrapolation from the present into the future, and an extrapolation from the past into the future. So, yeah, questions of whether gold is put in the bottom, the US dollar, has it put in a top, the broader equity markets. Are they ready for liftoff or are they on the verge of collapse?

Kevin: Well, look at the energy markets though. They’re very strong right now.

David: Exactly. So, you’ve got a lot of these which definitively are going to remain unanswered. Yeah, energy remains conspicuously strong. Of course, you’ve got, again, fundamental factors. Chinese and global demand destruction being a concern, potential reopening in the case of China as it relates to COVID, and of course, that’s one of the things that rattled natural resource prices last week in a positive fashion. And then you still have the Russian and Ukrainian war constraints impacting the supply side. So, fundamentals do matter, but you look at the price action of energy and it stands out against other sectors. So, you’ve got fundamental factors adding to debatable outcomes. Let’s look at a couple of technical indicators that I think give us at least a few hints.

Kevin: So, are you saying energy and healthcare are the exceptions right now?

David: Well, in terms of strength, they are showing a lot of strength, specific sectors, but if you’re looking at indices, almost without exception, indices and sectors are putting in lower lows. As prices have rallied back, the heights they reach, those highs are also lower than the previous rally levels. So, combination of lower highs and lower lows is ominous.

Kevin: That is the charts. I mean that’s technical analysis without fundamentals.

David: It’s usually confirmation of a bear trend searching for a last capitulation. So, each index is unique, but they do share a similar pattern. Since the end of 2021, early 2022, performance has been locked in down-trending channels, where, consistent with that last comment, the rallies lose energy at the upper end of the descending channel. Thus far, year to date have moved to retest or break to new lows, get lower lows, lower highs. That down trend is not particularly healthy. So, we’re at the upper end of that down-trend channel in the Dow and the Russell 2000. But then you look at the NASDAQ and S&P 500, which are far more tech heavy in terms of their components, and they’ve significantly underperformed. They have not reached those upper levels that the Dow has.

Kevin: It’s really no surprise that tech is leading the way down, because last year, we kept talking about it. They were ahead of everybody. We had four or five stocks that were just making up pretty much the whole index as far as the rise.

David: Right, with $1 trillion, $2 trillion market caps. So, over-owned shares maintain a selling backlog and that’s what we’re working off is the selling backlog, extra pressure on the S&P 500, extra pressure on the NASDAQ.

Kevin: Well, sometimes we forget there’s a limited amount of money that goes either into buying or selling. It sloshes back and forth, like when you’ve got one of those water containers in the back of your pickup and it sloshes back and forth. Well, oversold, you can have all the money into oversold waiting to go back into the overbought position. So, where are we at as the water sloshes back and forth?

David: Yeah, it does ebb and flow. So, we went from a deeply oversold condition in October to a somewhat overbought condition by the end of that month, by the 28th of October. While some companies regained and traded above their 200-day moving averages, the total numbers above that level were pretty anemic. We went from 10% of companies being above their 200-day moving average into the 30s. For frame of reference, 97% of the S&P 500 companies, this is the mid-year marvel—

Kevin: Above their 200-day moving average, 97%?

David: Yeah, midyear marvel in 2021. As the market was approaching its peak, 97% of share prices were above the 200-day moving average. Now you’ve got between 10 and 30%. So, yes, we’ve rallied, and yes, we’ve gone from oversold to overbought conditions, but you’re not seeing the strength there. Again, you’re not regaining ground that has been given up, and that’s a dangerous position to be in.

Kevin: Well, we also talk about a limited amount of liquidity, but liquidity isn’t always made up of dollar for dollar, is it? I mean it’s the cost of borrowing. Sometimes you have to watch the cost of borrowing, because if it’s too expensive to borrow, you see the liquidity hit.

David: Yeah. Kind of unrelated to technical analysis, one credit market dynamic is that credit spreads shrank throughout the entire equity market blow-off in 2021. So, think about this dynamic. As stock prices rose, spreads contracted. Spreads are the difference between borrowing costs for an individual company or for a sector and the 10-year Treasury rate. As the gap between them shrank through 2021, you could see this wild enthusiasm for equity prices. Apparently, there was zero risk involved. Now the gap in 2022 has grown, and this is a helpful measure of credit market duress. But throughout this year, even as equities have attempted rallies multiple times, the spreads in the credit markets have remained at elevated levels.

Kevin: So now it’s costing a lot to borrow.

David: It just lets you know that the credit markets say that there is not as much warranted in terms of these enthusiastic jumps to the upside. We talked about this last week. Bear market rallies are sharp and short, and the bond crowd looks and says, that’s right and we’re not going to be suckered into this. So, those credit spreads remain elevated and they have remained elevated. Re-expansion, a continued yawning, if you will, of credit spreads above the 10-year Treasury would confirm the bear markets next leg lower, right? In other words, we are not at the ultimate equity market lows. We’re not. The credit markets would tell you such.

Kevin: So, when the cost of borrowing goes way, way down, would you consider that a low?

David: Quite the opposite. As Michael Hartnett of B of A has commented, all great bull markets begin with corporate bonds.

Kevin: That’s contrarian thinking then. In other words, everybody’s charging too much to borrow. That could be the bottom there.

David: That’s right. He argues that once credit spreads show recession’s priced in, then we’re all in. In other words, you become an equity investor when the credit markets have priced in the worst, and they haven’t priced in the worst yet. That’s the point. From our perch, managing a hard asset portfolio, a short fund, the spreads have further to go to price in recession, and the bear firmly remains in a secular trend. We are not done yet.

Kevin: So, going back to contrarian thinking, when everybody’s in something, it’s about to reverse, right? It’s similar to that with the spreads. You’re talking about the credit spreads.

David: Well, that’s exactly right. When there is no stress whatsoever, and you’re priced for perfection, get ready for a debacle. When you’re priced for Armageddon, when you’re priced for Mad Max beyond Thunderdome—

Kevin: You better be buying if you’re a smart contrarian investor.

David: That’s when a bull market begins. That’s exactly what Hartnett was saying. All great bull markets begin with corporate bonds. In other words, spreads are blown out. They’re telling you the worst is now right in front of us. That’s right. Once the worst is all in front of you and it’s been discounted, then you can move on.

Kevin: So, are we seeing that in the foreign currencies right now? The dollar’s been so strong this last year. Is there a point where we go, “It can’t get any worse with the foreign currencies”?

David: Well, for weeks now, that’s what we’ve been asking about the dollar. Do we have one last spike higher? Do we get to the 2000, 2021 levels? I think it’s out of the question. We’re not going to see the 1985 Plaza Accord type levels, 1.65 for the dollar index. Not a chance. Not a chance, but trading at 1.15, getting to 1.20 seems reasonable. If you just look back at what’s happened over the last year, two years, let’s come forward from 20 years ago or 30, almost 40 years ago. From 2021, the trough level back in 2021, it reached a peak which was 28.6% higher, and is now giving a technical cell signal. The US dollar is giving a cell signal. So, on the one hand, we have a technical cell signal. On the other hand, you have a degrading macroeconomic environment on a global basis, and you can’t rule out wild behavior in the currency markets.

Kevin: So, you’re seeing a cell signal possibly in the dollar. Does that mean a buy signal in gold?

David: The fact that gold is attempting to put in a bottom at the same time is worth watching. So, the dollar has declined off of its peak, 1.15 as we mentioned, and is currently testing its 50-day moving average. It is a long way from that oversold condition. You have a lot more selling before that water sloshes back the other direction temporarily. Does that make sense? I mean it could slip and fall from here. If the US dollar is in fact putting in a top, it would be a trend with multiple years implicated. What I mean is that we’ve got pressure on the US dollar. In fact, we are putting in a top. We’d have pressure on the US dollar through probably 2025. So, we talked about down trend channels or these trading channels for equities. So, we’ve had the same thing for the dollar, only it’s been an uptrend channel since 2008. US dollar has trended higher since 2008, and is at the very top of its uptrend channel lines.

Kevin: This is technical. You’re talking technical, not fundamental at this point.

David: Historical peaks, again, you go back to that 20-year period of 1.20 or the 37 years ago, 1.65, the Plaza Accord. What would cause the dollar to reverse course? We’ve got a technical sell signal in the US dollar indicating that it should go lower. What would cause it in fact to spike higher? A global depression, a global depression could drive it higher. And that can’t be dismissed. That can’t be dismissed. But short of that, the charts suggests the next major area of support is 10% lower, and 20% lower is the most likely course over, say, a three-year period.

Kevin: One of the things I love about doing this show through the years, I mean going back to 2008, Dave, is we can go back and say, “Do you remember when we talked about such and such?” We can look back in the rear view mirror. 

David: We got a record of all the things we’ve said wrong. 

Kevin: Well, that’s true. That’s true. It allows us to process over time. It’s not so much about being right as learning. Jim Deeds always says you’ll learn far more from your mistakes. But one of the things I remember talking about a few years ago was when gold was bottoming relative to the dollar, it was rising pretty substantially against foreign currencies ahead of that time. Remember that? We talked about it and it’s like, “Gosh, I wonder when it’s going to catch up with the dollar.” It caught up quick.

David: Right. Well, I think the dollar comments are relevant to the next move in gold because if the dollar does break down from here, the commodity complex, the entire commodity complex in dollar terms gains support. Do they outperform? Do they jockey for leadership? Sure. So, I’m just talking broadly about support, not necessarily driving a massive bull market. But gold is already in an uptrend in other currencies and would just join the march higher in US dollar terms. That’s been something holding it back. Last week could have been the turn higher. Personally, I think it was. Time will tell, but we’re cautiously dipping a toe back in. Silver is already on a strong technical buy. Platinum is already on a strong technical buy. Gold is turning up on its weekly charts, which is at this point very constructive. This is the real sticking point. Macro factors in a bear market, the likes of which we haven’t seen in many generations, leaves us with a very humble disposition. Anything can happen.

Kevin: Anything can happen. We started the show talking about the Dow/gold ratio and there is a pattern there. It seems to go back to one or two to one and then it’ll go up to 20, 30, 40 to 1. So, explain that because we’re below 20 to 1, about that same ratio that we were in 1929.

David: Yeah. Well, some people look at technical analysis and they’re like, “This is no different than voodoo,” reading angel card. This is not science here. This is not science. What’s patterned is human behavior. What’s patterned is sentiment. And what you tend to see with a long enough timeframe in mind is these swings from greed to fear. These are long patterns of confidence building a little bit at a time, and then being shaken in a moment.

Kevin: The long pattern is much more solid as far as a historic truth. The short term patterns, they can go either direction, and you can get really in trouble if you go into debt and trade on short term patterns.

David: Yeah, the Dow/gold ratio sits just below 20 to 1. Three to one is the most probable number, with some historical support even for a one to one ratio.

Kevin: Right. Alan Newman’s been saying that for a long time. He knows it’s going to go below five.

David: So, let’s take Newman’s number. His target for the Dow is right around 14,000 and change. That’s a significant haircut from the current 33,000, but not unreasonable when you’re looking at long-term valuation metrics and what we have classically seen in terms of valuation metrics at market lows. So, a three to one Dow/gold ratio and a 14,000 point Dow implies gold at 5,000. That gets us to approximately three to one. 

There are other ways to get there. I mean, you could have a much lower Dow number and lower gold price or a much higher gold price and higher Dow number and still be at three to one. Other ways to get there, some of them more painful. When you think about gold being at $5,000, that’s 2.9, almost three times higher than current prices. Some people say that’s not even reasonable. Actually, it’s not unreasonable. If we revisit the earlier comments on sticky inflation, if we look at the structural factors of deglobalization and geopolitical disarray, they suggest that a basic three times move in gold to peak levels is quite defensible, particularly when you consider the history of a move in the metals. 

We go back to this notion of prices reflecting greed and fear at different points in a longer-term cycle. A high price for gold would reflect fear in the marketplace, and we don’t have that today. The last time we saw it in spades was with the Dow/gold ratio at six to one in the timeframe of the global financial crisis. If you back up into the ’80s, it did get to three to one, and then finally one to one. Again, this is in the ’80s, and we’re talking about a timeframe where the price of gold increased 20-fold. Just for perspective, when I say gold could go up threefold, it’s not uncommon when it gets to these market extremes and when fear is in motion and you start seeing a momentum trade build as a part of this fear dynamic. Threefold is nothing. We’ve seen 20-fold.

Kevin: Well, threefold in dollars, but what you’re talking about, and you use the word footprint all the time, your footprint could be as much as 20-fold. That’s the amazing thing you’re talking about.

David: Well, but you’re doing the opportunistic translation of ounces to shares, which is of course the way I think too.

Kevin: Why not? Because the dollar’s nothing in the long run. The dollar’s nothing. So, let’s go to shares.

David: Yeah. When Hetty Green was coming out of cash and going back into stocks, when any famous investor in that Dow period—1896 to, call it 1920s, 1930s, 1940s, you were, up until the 30s anyways—when you moved to cash, you moved to gold. They were one in the same thing.

Kevin: Cash was just a receipt for gold. You could go to the bank and actually translate that into gold, paper currency.

David: So, why would you come out of cash and go back into equities—or ounces, rather? The same thing in my book, ounces into equities. When value is compelling, when you get to buy companies at a discount, when that transaction is on the line, ounces to shares make sense.

Kevin: Dave, again, I want to roll the tapes back, because we did get to six to one on the Dow back in 2008. That was an interesting period of time because we were doing the Commentary and we were wondering if this was the one that was going to break on down. Guess what they said? The central banks came in.

David: 2011.

Kevin: They said, “We got this. We will do—”

David: Whatever it takes.

Kevin: “—whatever it takes.” They did because they had credibility. They were able to print money without inflation, and now inflation has caught up to them.

David: Credibility is on the line.

Kevin: So, what are they doing now? See, that’s the thing. We wanted to know what the central bankers were doing back then, and because they had credibility, they actually made an impact.

David: My guess is that as we go from the current 19 or 20 to 1 on the Dow/gold ratio and shift towards the low single digits, what keeps us from stopping at nine or at eight or at six or at five and actually continuing into those low, low single digits is that we have already tested the credibility of the Fed.

Kevin: They’ve lost. They’re buying record amounts of gold right now.

David: The behavior of the world central banks in 2022 supports a move higher in gold, 400 tons of gold in the third quarter, surpassing in the first three quarters of the year all full year central bank demand going back to 1967.

Kevin: They’re rushing into gold.

David: That’s a record-breaking year. Central banks are aware of pressure building, hedging accordingly. That’s worth thinking about because their purchases are not based on economic gain. They could give a rip whether or not gold goes to 2,000, 3,000, 5,000, 1,000. They’re having a higher percentage allocated in the direction of gold so that a higher percentage of their allocated assets are not subject to counterparty risk. It’s a defensive posture, and that’s worth thinking about. What do they see on the horizon that today’s equity and options bulls are neglecting? That’s difficult for us to translate, that their purchases are not based on an economic incentive, but rather an elimination of counterparty risk.

Kevin: They’re trying to preserve assets. They see something coming.

David: What do they see on the horizon? What are they dealing with now that represents true and enduring structural change that today’s equity and options bulls are neglecting?

Kevin: You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany. You can find us at mcalvany.com, M-C-A-L-V-A-N-Y.com, and you can call us at (800) 525-9556.

This has been the McAlvany Weekly Commentary. The views expressed should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional financial advisor to assess your suitability for risk and investment. Join us again next week for a new addition of the McAlvany Weekly Commentary.