Central Banks Now Have More In Gold Than In Euros 95% of Central Bankers See Their Gold Reserves Rising Over Next 12 Months Breakout In Silver & Mining Shares "When I talk about the investor coming into competition for ounces with a price-insensitive buyer, what's underappreciated about gold, truly underappreciated, is the supply inelasticity there. You can't just run an extra shift to have more ounces available, keep the mine open through the weekend and create more ounces. That is key to the way price behaves. That inelasticity is something that I think is going to be on display in dramatic form in the years ahead." —David McAlvany * * * Kevin: Welcome to the McAlvany Weekly Commentary. I'm Kevin Orrick along with David McAlvany. Well, what a difference a day makes. I should say a week, but from one week to the next, Dave, B-2 bombers and bunker busters can make a very big impact. David: Never a dull moment. As we discussed last week, B-2s would be involved to truly reduce, if not eliminate, the nuclear threat. Check. Done. We also made the case last week that Israel is not interested in peace with this Iranian regime, but certainly is interested in peace with the Iranian people, past aside. Trump is seeking, as we suggested, credit for bringing peace. You can see it moment by moment, deeply perturbed by noncompliance with the ceasefire, and his peace is indeed fragile. One Iranian official told Reuters, "We are rational enough to start a diplomatic process after punishing the aggressor." I think the next headline is what people remain on tenterhooks over: "Tit-for-tat will remain the reality as long as there's itchy trigger fingers." Kevin: Yeah. Iran's retaliatory strike was telegraphed to Israel, telegraphed to the United States. We had our guys, fortunately, ahead of time in bomb shelters. But when you've got a regime that basically says, "We do not accept that Israel is a viable country going forward," and if they continue with that, I have no idea how you get a long-term peace agreement, Dave. David: Yeah. Well, you get the chief advisor to the IRGC saying that we need to slit the throat of Netanyahu, cut off Trump's hand, and eliminate Israel from the face of the earth. That's two days ago. Kevin: Yeah. And we're talking about peace agreement. David: Right. Kevin: Right. David: Peace is indeed fragile. Ceasefires are not the same thing as peace agreements. Peace agreements are not the same thing as treaties. Even treaties are not the same as voluntary, enduring, cooperative, mutually beneficial relationships. Trump has made our friends reconsider those last words, and I think he's pretty good at winning and deals. I don't know that he's very good at enduring relationships, and so whether it's this relationship in the Middle East or our trade relationships in terms of trade which are less and less favorable, meaning we have less and less carrots, probably not a surprise that Trump needs more and more sticks as trade relationships remain strained. I think it's worth considering the best signal of global economic realignment. Kevin: Well, and those strikes were amazingly impressive, Dave. I was talking to a friend of mine a couple of days ago, and he's very well-connected to military tactical decisions and weaponry, as well as he has a pretty good understanding of long-term strategy. He said, "We can celebrate and appreciate short-term tactical victories, but we should not mistake that with long-term strategic goals." And so, Dave, when we talk about long-term, there seems to be various reasons for owning reserves, like these central banks. They own reserves to do transactions. Obviously, the US dollar is a transactional item, but they also own for security, a way of stepping outside of maybe the vulnerability of the US dollar. And gold has played that role over the last couple of years. David: Gold has now exceeded the euro in terms of a quantity held by central banks as a reserve asset. Dollars are still the number one. Gold at 20% exceeds the euro at 16%. As we frequently highlighted, the trend in gold has in recent years been well-supported by central bank reserve asset managers increasing their purchases. The three-year streak has been consistent at over a thousand tons each year, which accounts for between 28 and 31% of annual mine production. Again, we're talking about the best signal of global economic realignment. That is gold. That accumulation rate doubled, tripled the normal buying over the past 15 years. Their appetite is strong, and it's spreading across the emerging market central banks, who are less—far less—allocated to gold than your developed world countries. Kevin: You were talking about sticks and carrots with Trump. If you think about it, the sticks that we can employ and the carrots that we can employ have to do with our monopoly on the movement of money, and especially US dollars, access to that. Next week's Commentary, Dave, we're going to have Ed Fishman on, Eddie Fishman, who wrote the book Chokepoints. If you control the flow of money from one point to the next, whether it's US dollars or the means of getting it transferred, then you really do control the world. David: His subtitle tells you where the book is going, American Power in the Age of Economic Warfare. In next week's Commentary podcast, we'll talk with Edward Fishman, discussing his book Chokepoints. What he writes about is the invisible chokepoints that the Treasury Department, the Commerce Department, and State Department have crafted to guide diplomacy and reach strategic foreign policy objectives. Kevin: Okay. So it's a little bit like when you said an invisible chokepoint. Let's talk about physical chokepoints like the Bosphorus and like Hormuz. The Strait of Hormuz right now is in the news because that can be choked off. David: This week, we have heard a lot about the Strait of Hormuz. That is a physical and geographic chokepoint which, under worrying circumstances, could halt 20% of global oil supply from reaching end markets. Fishman served in the State Department, at the Pentagon, and also at Treasury. His narrative history of our economic warfare engagements includes the way that we've handled our relationship with Iran, past up to the present. Russia, China, also big segments in the book, and are critical for any informed investor to have considered as you're looking at allocations, as you're looking at the world as it is, and as it is becoming. He also contextualizes the move to gold by global reserve managers. When you see that economic warfare is the state we exist in, and consider the hardening of liquid assets from the attack of foreign interests, that is what central banks are doing in response to a two-decade tightening of various chokepoints. I think you'll agree, the trend of gold acquisition is in its infancy, when you survey the facts as he does. Guarding the agency of the state is not unlike the individual, the choice an individual makes when buying gold, at least theoretically. We may have different risks, but hardening a liquid asset base from the vagaries of the stock market, from inflation targeting by the Fed or various central banks, or more existential threats, it's important. Kevin: Well, and why do central banks buy gold in the first place? They're not really price sensitive, are they? David: No. This year's survey of central banks conducted by the World Gold Council had more voluntary respondents than any other, ever, which on its own is a positive sign. Of the 73 central banks that participated, 95% see reserves of gold increasing over the next 12 months. That is, they anticipate their colleagues to be buying. None of them—surveyed—intended to reduce their ounces, and 43% were making a commitment or anticipated adding, themselves. 73% of the respondents plan to moderately or significantly diminish their dollar reserve holdings over the next five years. Again, this is an enduring trend as they increase their exposure to the euro, the RMB—which I thought was very interesting—and of course gold. Kevin: Going back to the question. Central banker, if you asked him what is it that actually influences his decision on what he holds his reserves in, what did they say? David: When asked which topics were relevant to their reserve management decisions, 93% indicated interest rate levels. What fascinates me about that is that interest rate differentials favor a migration into US Treasuries. We currently have higher interest rates than most of the world. Of course, Trump is not too happy about that, and he's been pounding Powell over not lowering rates. But as it stands, we have about 100 to 175 basis point—1 to 1-3/4 percent—differential. And yet respondents are talking about walking away from US assets. Even with more attractive yields on offer. Across Europe, you've got bond yields that are notably lower than in the US, with the Swiss National Bank making the decision last week to return to 0% interest rates. And yet, for a variety of reasons, they prefer lower yields to those on offer in the US Treasury market. It reminds me of what Gillian [Tett] had to say in a Financial Times article a few weeks ago. We're moving to a backdrop where politics is driving economics. More than anything, you could argue that the central banks are making a political decision. It's not just about the math anymore. Kevin: And they don't really want to admit that. They'd rather say, well, it's interest rates that are driving us, but that's a contradiction because they're actually buying gold. So what are the relevant factors in the decision to buy gold? David: 85% of respondents indicated that gold's performance during times of crisis is highly or somewhat relevant to their organization. 81% of respondents also indicated that gold's attribute as a portfolio diversifier was a relevant factor.