Trump administration rumors of rerating foreign bondholder coupons could trigger a sharp, historic shock in the dollar, with 30% of US debt held by foreign countries like China, Japan, and South Korea.
Walmart’s Doug McMillan stated that 30% of tariffs are not yet priced in due to narrow retail margins, suggesting significant future inflation and consumer impact.
China’s rapid industrialization and self-sufficiency efforts, including massive investments in chip plants and mega factories, are reshaping the global economy and reducing reliance on the US.
Consumer confidence and sentiment at historic lows, with 5-year inflation expectations at a 25-year high, indicate the average person isn’t buying the optimistic economic narrative.
Tariffs and trade war news are currently more impactful to markets than Fed actions, with Lyn Alden’s fiscal dominance thesis playing out.
Ongoing helicopter money since COVID lockdowns, with trillion to multi-trillion dollar deficits, is papering over economic consequences but contributing to inflation and recession felt by voters.
Trump’s pro-business, pro-growth agenda of cutting taxes and regulations is likely to create more economic activity, but could be inflationary without corresponding budget cuts.
Major changes in the global economy, reminiscent of the Nixon shock, are expected from Trump’s America First policies, potentially leading to a fundamental reordering of the global economy.
Lower oil prices can keep inflation lower by reducing transportation costs, but if prices drop too low, Saudi Arabia and OPEC may overproduce to maintain market share and pressure Russia.
Mining stocks should benefit from lower oil costs and high metals prices, delivering higher margins to shareholders, especially for projects with high fuel costs in remote locations.
If gold companies report higher margins in a world of economic pain and uncertainty, it could attract momentum-chasing investors to the mining sector, driving outperformance.
The US economy was slowing down before tariffs, with stimulus leaking and the robust economy growing long in the tooth, typically cycling towards slower growth.
Consumer and corporate sentiment fell sharply due to tariffs, while retail sales got a temporary boost as people tried to beat tariffs by buying cars and cell phones.
Companies unable to pass tariffs to consumers may face reduced profit margins, leading to layoffs, reduced expansion, and less spending, negatively impacting the economy.
The 10-year US Treasury yield reached 4.5%, its highest since late April, driven by narratives that tariffs are inflationary, despite fundamentals showing lower inflation.
If the 10-year yield breaks 5%, it could signal trouble for risk assets like stocks, as lack of buying demand from institutional investors at this level might be concerning.
The Treasury could reduce supplemental leverage ratios (SLR) for banks, allowing them to buy more treasuries and make loans, as a potential response to rising yields.
Gold’s price is less important than the dollar to gold ratio, which is changing, making it a valuable asset as an insurance policy, currency, and store of value.
The historical trend shows a clear decline in dollar value, with $35 buying an ounce of gold in 1970, compared to $3,200 now.
Gold and silver are in the early stages of a long-term secular bull market that could last for years, with gold breaking out of a 13-year cup and handle pattern in March 2024.
The bond market is in a secular bear, causing money to slowly move out of bonds and into gold, with Goldman Sachs projecting gold could hit $3,700 by year-end and $4,000 by mid-2026.
The gold to S&P 500 ratio has been closely correlated with ETF flows, indicating that the next move higher in gold relative to the stock market will likely trigger increased flows to GLD and other ETFs.
The recent gold breakout is likened to the gold stocks’ breakout in the mid-1960s, which led to a spectacular move higher from 1964 to 1968 before a bear market.
The inflation-adjusted price of gold has broken out of a 45-year base, suggesting significant potential for future gains.
When silver breaks above $50, it will trigger the most significant breakout in capital markets history since 1971, potentially leading to a spectacular move higher with significant volatility.
Gold stocks have broken out of their own 4.5-year long base and are trading at historically low valuations, indicating potential for outperformance even if gold prices remain stable.
The managed money has cut their net long gold future positions by about 40% to a 15-month low, suggesting a healthy clearing of froth and setting the stage for a new advance.
US gold reserves now make up just 13% of the Fed’s balance sheet, compared to 100% levels in 1934 and 1980, indicating significant room for growth.
Investors should focus on a mix of physical metals, ETFs, and junior mining stocks to capitalize on the potential bull market in precious metals.
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