Dow/Gold Ratio Is The Key Gold Reduces Investment Complexity Unemployment Shock Puts Fed In A Corner "Your most reliable hedge is something that doesn't do a lot of different things. It's not like a Swiss Army knife—does a little bit of everything, but nothing very well. Gold is wealth insurance. In its purest form, it doesn't need complexity. In fact, the performative aspects of gold— One of the things that makes it really interesting for a high-net-worth individual, a family office, an individual investor, is that it does not have complexity." —David McAlvany * * * Kevin: Welcome to the McAlvany Weekly Commentary. I'm Kevin Orrick, along with David McAlvany. David, it seems that the Fed is really caught between a rock and a hard place. Unemployment numbers came out last week. It's not looking good. It's looking like it could even be recessionary. Yet we have high inflation right now, so what do you do? How do you fight this without running inflation hot? David: Yeah. There are some key figures and data points that come out this week, and a few that were given to us last week, that could be very impactful for the markets. Kevin: So do you think this is why the rally continues right now with gold hitting all-time highs? David: Yeah, I think it's certainly a factor. I mean, the rally continues. We have daily new highs in gold, which come as no surprise to those that track world events and global markets. I mean, first of all, in a week's time we had Japan and France both experience a leadership meltdown. Kevin: Yeah, both prime ministers left. David: In France, that's the third government in 13 months. Kevin: Wow. David: Reason for no confidence? This is where, again, thinking of France and why the no confidence vote was called, the prime minister dared to suggest that deficits are unsustainable. In a socialist country, guess what happens? Kevin: Yeah, you're not allowed to do that. David: No. Also, in the last week, we had the SCO Summit sponsored by Xi Jinping. It was for all intents and purposes a giant flex-off for the growing axis of anti-dollar, anti-Western strongmen. Kevin: Do you think that was his fightback? Putin with the B-2 flyover? In a way that was embarrassing. Now, what you're seeing is these leaders over in the East, they're saying, "I don't think we've really shown you our force." David: Again, think about the gold market, whether it's a grand military parade or a humiliating no confidence vote. There are not-so-subtle signals of instability around the world, and it's well represented on the front pages of papers. The subtler signs come in the price of things, and perhaps people are not connecting the dots between gross instability and the moves in gold. Kevin: So why don't we talk a little bit about the unemployment numbers, because it is pretty substantial. David: And I think when it comes to the price of assets, most people are too busy to care, and so the things that impact the price of assets are something that are further down the food chain of interest and concern. Non-farm payrolls weak on Friday, month-over-month revisions came in less than expected, so the full report was in a mildly bad category. You got a big boost from the birth-death modeling, and there were also some seasonal adjustments which were unseasonably—or unreasonably—large relative to earlier years. Then we had revisions this week, and these are sort of full-year revisions. Basically 911,000 jobs that we thought were in the economy are not in the economy. We must have miscounted. So the beauty of the 911,000 job revision that we got earlier this week, it makes a much stronger case for a 50 basis point cut. So it's something that actually, bad news is good news if you're a speculator in the stock market because you know that free money's coming. Maybe not just the 25 basis points that are priced in, but there's a growing probability—10%, 15, maybe even 20%—that we have a 50-basis-point cut. Kevin: Well, let's go to the topic of the price of things because a lot of times a person will say, "Well, what difference does it make, prices?" You remember Al, who used to work here, you could name a year and a player and he could give you a batting average for just about anybody who had played professional baseball. It was amazing. David: Al, yeah. Kevin: Or you could throw numbers out and he could calculate it on the fly, but you, it's a little bit different. I can listen to you talk and it's like, "Okay, Dave, how in the world do you keep up with all these price moves, and honestly, why?" David: Well, the biggest reason is it's my job, but PPI and CPI, just before we move beyond the news, big news of the week this week, we've got PPI and CPI, already in light of weaker employment data the probability of that 50-basis-point cut has increased. And again, I think we have to watch what happens this week with the inflation numbers. That will define the conversation and probably put some brackets around what the Fed is able to do. Kevin: Well, inflation right now I think is pushing higher than it's been since COVID began. David: Yeah, it's certainly a factor, and I think when we come back to pricing things, and coming back to assets, the subtle signs are those that come in the price of things. With the gold market, simple demand dynamics, for most people going about their routine business each day, these subtle differences really don't factor in. I mean, yes, they care about groceries and that costing more. Very few people take notice if the yen is higher or lower by a few points. If the 10-year French government bonds tick up or down 10 basis points, it frankly takes something shocking for most people to care. My eldest son was rightly observing and maybe even criticizing my fascination with asset prices. He said something to the effect of: the frequency with which [you] look at [your] phone to see the gold price, it rivals most men's fascination with sports statistics. Kevin: Yeah, there's the batting average thing, right? David: So perhaps it would be fair to say more people would pay attention to subtle shifts in the market if they understood the game afoot and how the score is kept. Reflected in price are things like faith—faith in a group of people like the central bank—confidence, fear, ambition, boldness. And in the price of assets you have rival interests and consequential—sometimes even life and death—outcomes. What I see in the drama of prices, others find that same drama on a day-by-day basis watching football and wondering if, fourth and goal: are we going to get it across the line? For us, getting it across the line does come to the non-farm payrolls last week. It does come down to CPI and PPI. It does come down to the consequential choices that central banks are making that either create avenues of capital flowing in or shut those capital flows off. Kevin: Yeah, so you were talking about a goal line, using that as a metaphor. There are thresholds that are very, very important on any of these price numbers. David: And I think we're getting to some thresholds that are garnering attention in gold. Gold is obviously breaking out to new highs for the majority across the country and around the world. There is a gasp of surprise that gold has surpassed $3,500 an ounce, now $3,650 an ounce. Only I would say a few, very few informed investors know that projections for the remainder of the year and next are migrating north of 4,000, of 5,000 an ounce amongst the Wall Street firms, and that's happening more routinely by the day. Kevin: So when I came in 1987, gold was between three and four hundred dollars an ounce, and to be talking about $4,000 gold, Dave, is it the end of the world? I mean, that's what you would be thinking, possibly, from that 3, $400 level up to 4,000. Is it the end of the world? I mean, does the world think that? David: Not if new all-time highs in the Nasdaq index are an indication. We're not facing the end of the world. We are facing maybe the end of a valuation push to the upside. Smart money has a few considerations that are percolating up in conversations more and more, and I think those conversation points are becoming easier for all investors to appreciate. Kevin: You just got back from, actually, a TV shoot, Dave, where you were doing a commercial, and the way you basically were presenting gold at that time was just wealth insurance. That's a good, uncomplicated way of thinking of why gold is rising, isn't it? David: Yeah, the short list: Gold is tangible. It's unlevered. It's counterparty free. Gold functions as that asset which holds value through crisis, defaults, and political instability. So if you need a macro portfolio overlay: gold. If you need a tail risk hedge: gold. If you need a duration and diversification hedge: gold. Kevin: So in English, wealth insurance. David: Yeah, plain English, if you need wealth insurance: gold. It's often criticized for lacking an income component, but the asset needs no interest rate attached to it to garner interest, and that's one of the most intriguing aspects of gold. Gold is gold. Kevin: But we live in a day and age— It's funny, we have so many acronyms. I was just made fun of earlier today for not knowing the meaning of an acronym. There are just so many things thrown around. There's a complexity to everything right now. Gold seems so simple. Do you think that that's one of the reasons why people are moving toward it? David: Yeah, and I think it's one of the reasons why, up to a certain point, it's overlooked because you'd much rather create a hedge in the derivatives market when in fact your most reliable hedge is something that doesn't do a lot of different things. It's not like a Swiss Army knife—does a little bit of everything, but nothing very well. Gold is wealth insurance. In its purest form it doesn't need complexity.