Central Banks Purchase Record 400 Tons of Gold

Powell pops the pivot presumption

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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,