Everything Is Coming Up Gold

There is never a good time for America to have a trade war, especially in a year when $9.2 trillion of debt has to be rolled over. That is a lot of debt that needs to find buyers, which could use the help from several of the countries America is fighting with using tariffs.

We’ve all heard of overhang in a market, but the bond market has the granddaddy of all overhangs. Of the $9.2 trillion, a whopping $6.5 trillion needs to be done by July, with the remaining $2.7 trillion by the end of the year. Who is going to buy all that debt and what yield will they want?

Since Trump announced the tariffs on what he calls “Liberation Day”, then blinked for a 90-day pause while going all in with China, the bond market has been on shaky ground. Which is about to get even more shaky with the $9.2 trillion elephant in the room, even if there wasn’t a trade war in progress.

What has caused the bond market troubles of late has been the selling pressure from foreigners, with speculation it is China. Evidence that it is foreigners can be seen in the drop in the US dollar and strength in gold.

When foreigners sell American bonds, they receive US dollars, if they don’t want to own the debt, they don’t want the US dollars either. So they sell the US dollars and then move it elsewhere, and the strength in gold suggests some of it is going into gold. Or as I prefer to call gold, the soundest money, as it has no debt or money printing machine associated with it.

Around 30% of the American debt is held by foreigners and the rest is owned by the Fed with around $7 trillion on their balance sheet. Government trust funds also own just shy of $7 trillion. Then the rest is owned by American banks, mutual funds, pension funds, state and local governments, and individuals.

Do any of them have an extra $9.2 trillion kickin around? If they do, they have to come up with $6.5 trillion before July, and then find another $2.7 trillion by the end of the year. If that sounds like a gargantuan task, it should because it is.

The task doesn’t end there because the politicians in Washington (led by the GOP) want to keep the spending at the pace it was under Biden’s final year and they want to raise the debt ceiling by $4-5 trillion. Even without a trade war, they should be slashing spending, but that is not the plan.

Of the foreign owners of the debt, Japan is the largest and they have their own issues to deal with that have been compounded with tariffs and uncertainty about what the final terms of a trade deal with them will be. If and when remains to be seen. China is the second largest holder and Trump is going all in against them in the trade war.

Japan may not want to be a seller, but they may have to in order to deal with their own economic issues, plus the uncertainty of what a trade deal will look like and when one can be concluded. Trump has said not only does he want trade deals that are great for America, he also wants trading partners to buy more stuff from America to balance the trade, and pay compensation to America for past trade imbalances.

Those are big asks for any country. I doubt if even a few can be concluded during the 90-day pause. Trump caved on the immediate tariffs with almost every country because someone whispered in the dear leader's ear that the bond market doesn’t like your tariffs.

Japan is more of a likely seller of bonds than a buyer that can help with the $9.2 trillion gorilla in the room. Which brings us to the other big holder China.

Trump has tried to bully China with nearly 150% tariffs that will bring trade between the two countries to a screeching halt. China will not be bullied, they have a culture that saving face is paramount. Both countries have dropped the gloves and seem to be set on fighting with full force.

Resolving the battle between China and America on trade looks to be an even bigger problem than the $9.2 trillion overhang in the bond market.

In the West, many think that America holds all the cards and China will have to bend to their knees and say thank you. But, China has a few cards up its sleeve, including $700 billion or more of American debt. Plus, rare earth elements and a strangle hold on refining them and other critical metals.

Not only did America outsource its manufacturing of goods to China, it outsourced a lot of metals mining and most of the refining to China. Metals that are needed for industrial and military purposes.

Many, including myself, believe that China is already putting the screws to the bond market to give Trump a wake up call.

Trump and the MAGA crew make the case that the rest of the world has been abusing America on trade. Right into being the largest economy in the world, which defies logic, but here we are and Trump’s party controls all levels of government.

Looking under the hood reveals a different story. A big reason that America has been able to be the largest economy in the world (while also being the largest debtor) is because in addition to having military might, they also enjoy the fruits of having the world’s reserve currency and a money printing press.

Cracks are forming when it comes to having the world’s reserve currency as it has dropped around 10% in the reserves of global central bankers over the past few years. I would hazard a guess that fighting a trade war while also having a Death Spiral of Debt and unsustainable growth in the cost of servicing the debt will cause that position to decline more in the immediate future.

With the incredible supply of debt in America, the last thing you want is to make the second largest foreign owner of the debt question why they own so much of it and US dollars. To help with the supply problem that is getting worse with the $9.2 trillion of debt, they should be courting them to hold onto their debt and buy more.

The debt is what enables America to be a consumer nation that imports more than it exports. Much more. In the past, foreign countries would ship stuff for American consumers and receive US dollars that they would then send back to America by buying the debt. But, that apple cart has been upset. Trump and his MAGA crew, and his less than esteemed advisors want to dismantle the apple cart.

I have little doubt that China has been putting pressure on the bond market, which is likely causing foreign and domestic owners of the debt to do the same. As big and liquid as the American bond market is, it still comes down to supply and demand. If those that own the supply are getting nervous, it becomes a buyer’s market in which they can demand higher yields.

Evidence that it is in fact a motivated foreign seller in the bond market can be seen in the US dollar and gold. While bonds have gone down and yields up since Trump’s “Liberation Day” the US dollar has gone down and gold up. What that tells us is that whoever is selling bonds, is also selling US dollars and buying gold. These are actions that are consistent with it being China because years before the trade war, they have stopped buying American debt and buying lots of gold.

They aren’t the only ones buying gold, other central bankers have been doing the same. Gold surpassed the Euro in 2024 to become the second highest foreign reserve currency held by central bankers and is making up ground against the US dollar and that is likely to continue.

This trend has been going strong for the past few years and 2025 could easily be the best year of all. Fuelling the gold bull market has been the Death Spiral of Debt and unsustainable growth in the cost of servicing the debt.

Gold didn’t need a trade war to keep the bull market in healthy shape.

Another thing the gold bull market didn’t need was stagflation but it is very bullish for gold. Mass deportations have taken plenty of migrant workers and consumers out of the market, which will slow down the economic growth and increase inflation. The exact same thing will happen due to the tariffs.

Those numbers haven’t appeared in the government statistics yet, but they will in the next month and for months into the future. Consumer sentiment is already giving the signals as they are dropping to a level that only happens during recession. Maybe this time is different, but probably not.

More issues for the outlook for economic growth and inflation are coming from Corporate America. CEOs at private and publicly traded companies are saying loud and clear that the tariffs are making it hard for them to make plans and act on them due to the uncertainty of the tariffs. Flip-flopping Trump who leads by decree with social media posts is making the water more murky.

What is happening in the bond market has been the reason for Trump’s flip-flopping on tariffs plus how much he wants to punish American consumers and businesses with tariffs that are really a tax on them. The bond market hates these tariffs, as does Wall Street because they know the reality of the supply of debt and how troublesome it is going to get with the roll over of $9.2 trillion.

Which brings us back to the question of who is going to support the bond market? Japan can’t, in fact they have more reasons to be a seller than a buyer. China is a motivated seller that likely wants to send some of the money they are harvesting to Europe to support that region into buying the stuff they produce to replace what they are losing from the drop in trade with America.

Trump’s tariff tantrum has alienated other potential foreign government buyers. So there likely won’t be help for the bond market coming from foreign buyers, in fact, it won’t surprise me if the foreign held American debt drops down toward 20% or lower.

Which leaves it all up to domestic buyers. Outside of the government pension plans are the institutional buyers and wealthy individuals. They are the ones that lead corporate America and are having troubles making plans and acting on them due to the tariffs and other economic issues. Can they eat all that paper?

I don’t think so. Who is left? Government pension plans which can be squeezed to buy more but that has limits. Bessent has said in the past couple of days that the Treasury could buy bonds to support the bond market, yikes.

Then there is the buyer of last resort, the Fed. They have already slowed down their quantitative tightening to nearly nothing. Throwing in the towel to reduce their balance sheet.

It doesn’t look like it will be long before they get back in the business of quantitative easing to increase their balance sheet. Likely in a massive way. It won’t surprise me if this year and next they have to go past their previous record of having $9 trillion on the balance sheet.

The Fed is predicting that the economy will slow down, while practically every analyst on Wall Street is calling for a recession. Meanwhile the Fed is coming to terms with the persistence of inflation that has been so strong that they have admitted that their models on inflation have fallen apart.

It is inevitable, due to the government spending and growth of the debt, plus the rapidly growing cost of servicing the debt, that the Fed is at or near a crossroads. In which they will have to decide to throw the economy and stock market under the bus, or inflation.

This is happening precisely when stagflationary problems are getting more intense. The chances of a recession are increasing, whether it drops into one or toward one is problematic when the inflation is not cooperating. It is looking like 4-5% of stagflation is in the cards for 2025.

Once stagflation gets going, it is very hard to stop because the Fed has no tools to fight it. Lower rates and inflation kicks in, raise them and the economy and stock market go into a hellhole.

I’ve said it before and will say it again, all roads lead to gold. The Death Spiral of Debt, plus the unsustainable cost of servicing the debt, the politicians on the left and right addiction to spending and growing the debt, the trade war and stagflation mean that gold is going a lot higher.

Ultimately, the debt and fiat currency system is broken and the only way to fix it is with the Gold Standard 2.0.

Investors have terrific options when it comes to these various issues. One is to sell overvalued Wall Street stocks, and consider going short. Plus, they can also look at buying foreign stocks that are trading at cheap valuations.

But, the best option is in gold, and even better is in gold stocks. The central bankers and ultra wealthy investors will keep driving gold higher. Generalists can own gold above ground to protect their wealth and savings, as well as to protect themselves against the constant destruction of purchasing power of fiat currencies.

If they want to grow their wealth, the gold stocks are a super fat pitch. High-cost gold miners are making around $1000 per ounce on every ounce they mine and the low-cost miners are selling gold for over double the costs of mining their gold. The gold miners are free cash flow machines that are increasing the cash on their balance sheets at an impressive rate.

Gold mine developers with high-quality projects and gold explorers with important discoveries are in short supply.

No matter where you look along the gold stock food chain, quality stories are coiled springs like never before.

All the best,

Allan Barry Laboucan