ROSS NORMAN : Bond yields set to fall, gold likely to rally further.
At first glance, the tariff saga looks like an epic economic suicide note.
Who would deliberately cause a stock market correction, wiping 10% off the S&P, 11% off the Nasdaq and cause losses of $6.6 trillion with the largest 2 day loss in history. But as Shakespeare's Hamlet said “though this be madness, yet there is method in it”.
And it would have to be a very compelling reason to justify such extreme damage both to international trade, and to domestic US investors, of whom an estimated 64% are said to own stock … not to mention credibility.
No, I am not a bond guy, but come with me …
So here's the thing : the US has $9 trillion in debt to issue in the next 12 months as existing bonds mature with most of those outstanding notes having been sold at less than 3% on average. Refinancing at say 4.5% would cost the US an additional $145 billion in interest payments by my calculation … that is roughly one third of the defence budget or medicare. Definitely not small fry.
Net interest payments in 2024 were $882 billion and likely to be near $1 trillion this year. Further, this side of 2030 the US has a massive $28 trillion of short-dated debt to refinance causing a further significant spike in interest servicing costs to come. Problematic ? … sure.
So with rising debt, compounded by rising interest rates, it looks as if the US may be trying to engineer a collapse in rates, seeking to refinance itself at much lower levels. If rates fell from the current 4.5% to say around 3.5% that would be a saving of around $100 billion.
So the US is borrowing to pay interest on its debt .. is it out of control ? … the jury is out on that. But demographics, falling tax revenues and rising costs are pushing debt/GDP to very uncomfortable levels. Extreme measures were required. But a large component of the outcomes is also confidence … and there has unquestionably been collateral damage here too.
So back to gold …
The inverse relationship between gold and treasury yields is not entirely reliable (see below) but its underlying logic is clear – as a non interest bearing asset gold should behave inversely to an asset that does bear interest – bonds. And what is clear is the US desperately needs to work treasury rates much lower.
And then there's the US dollar.
For the past 80 years, the dollar has been the world’s main reserve currency, serving as a global store of value, a key facilitator in the financial system, and the primary medium of exchange in international trade. A weaker currency begets a trading advantage when it comes to export sales and hence the race to the bottom as countries seek to benefit through devaluation. The US Dollar Index is currently off about 10% YTD and at a near three year low against a basket of currencies ; arguably a weak dollar is part of the Trump administration economic recovery plan and likely to persist.
So, the wins for gold are threefold...
Firstly lower treasury yields and US dollar are traditionally strong tailwinds for the gold price. Secondly, as confidence in US assets wains, gold becomes increasingly seen as the 'last man standing' safe haven for investors - especially in Asia … and thirdly, central banks who have sought to diversify their reserves into non-dollar assets will likely feel compelled to accelerate those plans, especially as the US appears an erratic and unreliable counterpart.
It is perhaps testament to just how difficult things are for the US that they are prepared to play lose and fast with their very credibility in order to resolve the debt problem. Worst of all, there is the potential for a crisis of confidence creating a feedback loop, with investors in US debt demanding higher returns to reflect the inherent risk … exacerbating the very problem through higher interest payments and by extension further rises in debt.
Clearly this has not been lost on gold. It is said the gold price, as the sum of all fears, says some fundamental things about the state of world affairs … and just now, it is very distinctly sounding out a warning.
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Ross Norman
CEO
MetalsDaily.com
ross@metalsdaily.com
www.MetalsDaily.com