Lower Interest Rates: Get Em While They Last

McAlvany Weekly Commentary

Gold Rising With Long Yields Signals Trouble China Military "Shows Love" To Taiwan Central Bank Gold Buyers To Be Followed By Mass Public Buying The McAlvany Weekly Commentary October 23, 2024 "The world of shadow banking and financialization is breaking into new territory. Private credit is what everyone is fawning over today, and it's capturing market share from commercial lenders. In fact, it is the new subprime. You've got juicy fees, you've got opacity, you've got lockups for investors. And frankly, if you can fog a mirror, you have access if you're a borrower. The last week, comments from Neel Kashkari at the Minneapolis Fed, he's claiming that this is actually a safer version of credit expansion than commercial lending. I think we're going to get to test that supposition in the next correction, and I think his credibility will be tested along with it." —David McAlvany Kevin: Welcome to the McAlvany Weekly Commentary. I'm Kevin Orrick, along with David McAlvany. Well, David, we're recording remote today because you have been speaking at a conference. I'd like to hear a little bit about that before we start talking about what you've been talking about. David: Last week was Dallas, this week is Florida. So, from one conference to the next, it's been busy on the road. Kevin: Well, Dave, there's so much to talk about. We've got people calling in saying, "Hey, gold's awfully high right now, isn't it?" And interest rates, we've seen interest rates rising, Dave, over the last few years, and we've seen gold rising at the same time. What does that say? Does that mean Summers-Barsky, the theory that higher interest rates mean lower gold, do you think we're throwing that away at this point and we're seeing something more like the 1970s? David: Well, the conversations at the conference were pretty intriguing. At the end of a long weekend, and I was listening to real estate experts primarily, the group's consensus was in line with the Fed's and with Wall Street equity traders'. Lower rates are here, and more are coming. So, for real estate investors, it's good news, particularly for the battered segments of the real estate market, at least for now, if that's what actually materializes. And I suspect they'll be right for short time, but wrong in the intermediate to long term. Next year, at this time, I think a surprise in bond yields is likely to be to the upside, not to lower levels. We mentioned Stanley Druckenmiller last week on the program. It would seem by his allocations—short the bond market—that our thinking overlaps with his. Kevin: Well, Dave, for years you've brought up the Summers-Barsky thesis, where it says higher interest rates mean that people can go out and get more income, so they're less likely to buy gold. We've seen the rise in interest rates, and you've been talking about, over the last few weeks, the rise in the yields in longer bonds. You would think that if gold was just playing off of the Summers-Barsky thesis, then it would be going down right now. Granted, you're talking about short-term rates coming down, but longer-term rates are still pointing to— Like you said, in the long run, we're nowhere near the end of this interest rate rise. David: Well, noteworthy for the gold market is the breaking of the inverse relationship between gold and interest rates. And this started back in 2020. Rates increased dramatically from negative yields to over five, five-and-a-half percent. Gold moved higher despite that. So, declining yields reduce the opportunity cost for owning gold. Rising yields increase that opportunity cost. So, in theory, that should cause gold selling and a drop in price. Yet rates have been rising, and that has not taken away gold's glint and gleam. This is almost very much like the '60s and '70s. Gold is rising alongside interest rates, and so it forces you to ask the question, is gold telling us there's more inflation ahead?