Gold Is Heading Much Higher And The Gold Stocks Are Coiled Springs

Trump blinks on trade war with China, which has both countries dropping tariffs against each other while they negotiate a trade agreement. Stocks jumped up on the news, while bonds are down and yields are up. They didn’t eliminate all tariffs, but have calmed, for the time being, concerns about supply chain shocks.

Damage has already been done to the supply chains as shipping has dropped since the tariffs were initiated. The cooling off period to negotiate a trade agreement will get the ships moving again, but it doesn’t mean all systems are clear, as a trade agreement with America and China will take a lot longer than the 90-day cooling off period and there will likely be some muscle flexing on both sides that could derail an agreement. The tariffs are still historically high so the bullet has not been dodged.

America wants a win-lose agreement and to keep a certain level of tariffs on all trading partners including China. While China has heard loud and clear the negative rhetoric against them by Trump and his team toward them, and they know they have to be extremely careful as Trump has proven he can’t be trusted when it comes to trade agreements.

A perfect example is the USMCA agreement with America, Mexico and Canada. Trump negotiated and signed the USMCA trade agreement in his first term and promoted it as the greatest trade deal ever. Now he wants to rip it to shreds, shove it down Canada and Mexico’s throats and make a win-lose trade agreement making Canada and Mexico losers and America the victor.

Another example is the recently announced advancement toward a trade agreement between America and the UK. America has a trade surplus (not a deficit) with the UK, and yet the UK will have to continue to pay a 10% tariff and reduce already low tariffs on their end even lower. If this is how a country with a trade surplus will be treated, it is a signal that every trading partner will have to commit to a win-lose trade agreement.

If Trump’s “greatest trade deal ever” can be ripped up, how can he be trusted to make a long-term trade deal with any country?

Canada has fought alongside America in every military conflict and been a great trading partner. Sure there is a trade deficit, but keep in mind that America is a much bigger economy and has a stronger currency. Meanwhile, Canada has bought more from America than any other trading partner. Canada is America's best friend and is being treated like an enemy.

The UK is a similar story, they have been a military ally and joined forces on every military conflict for over 100 years. And they have a surplus in trade, yet they still are being treated as an economic enemy forced to take a win-lose trade deal.

Meanwhile, China has been made out to be an arch enemy concerning trade. Will they be interested in a win-lose trade agreement negotiated with Trump who can’t be trusted to negotiate a trade deal that lasts for the long-term? I’m skeptical they will and the trade deal could easily get frosty again as each side plays their respective cards. Even if they play nice with each other, a trade agreement will likely take well over a year.

Nonetheless, Wall Street stocks have cheered the cooling of the trade war between America and China. Even before the tariffs were implemented, Wall Street stocks had historically high premiums. They were priced for perfection.

Since the tariffs were announced, earnings estimates were dropped by analysts. During the recent quarterly reports, companies were able to beat reduced estimates and come out with a narrative that quarterly reports were not as bad as expected.

The most alarming thing about the recent quarterly reports was a term that became common. Many Wall Street leaders suspended guidance due to economic uncertainty.

Valuations are already stretched on Wall Street stocks and got more so today, and are back to being priced for perfection. What hasn’t changed is the difficulty for them to give guidance due to economic uncertainty.

Neither has it changed that companies and consumers are still challenged when it comes to planning for the future. The economy is slowing, which won’t change because the tariffs are still high on many countries and products, plus at the current levels, inflation is going to ratchet up.

Despite economic numbers on growth being overstated during Biden’s final years and inflation being understated, stagflation started well before Trump came back into office. Mass deportations and tariffs with every trading partner will make stagflation get worse.

Nothing has changed with the Death Spiral of Debt that is getting much worse with the cost of servicing the debt unsustainable. Making matters even worse is that $9.2 trillion of debt and plenty of foreign investors have to be concerned about buying more with such an extreme supply of US debt.

Even though the GOP controls all levels of government, they have no interest in slashing spending, in fact they are going to increase spending as predicted in past reports even before Trump got into office. The deficit is going to get worse under Trump 2.0 than even during Biden’s term which was the worst ever (followed closely by Trump’s first term) for a one term president.

Further evidence that they have not overcome their spending addiction (both the Democrats and GOP) is that the GOP wants to increase the debt ceiling by $4-5 trillion. One thing you can always count on is that politicians on both sides are spending junkies.

The key driver of the bull market in gold has been the Death Spiral in Debt, and that will only get more bullish for gold. Gold didn’t need a trade war or stagflation, and even though the battle lines are being redrawn on the trade war, it is far from over, and stagflation is about to become a problem that no investor inside or outside of America can ignore. Unless they have blind faith in American exceptionalism.

Priced for perfection Wall Street stocks, during a period when corporate leaders need to suspend guidance due to economic uncertainty (when it is still uncertain and could be many months before it improves) makes them very risky.

US debt is equally as risky, with unprecedented supply that is getting much worse, and is far from risk free.

If Wall Street stocks and US debt is risky, it means that foreign buyers don’t need to buy US dollars in order to buy American assets.

There are many more arguments to be bearish on Wall Street stocks, US debt and US dollars. America is less exceptional and the US dollar becoming a dirtier shirt in the world of fiat currencies is much stronger than the contrary position.

The bullish arguments for gold are in a perfect storm to go much higher this year and for many years into the future.

The bullish environment for gold is making the gold miners free cash flow machines that are adding cash to their balance sheets at a remarkable rate. There is no industry that can say the same, gold mining is in the midst of being the best industry of all industries.

Yet, the gold miners are being priced as if gold was worth around $1000 less than its current price and not pricing in the potential that gold is going much higher this year and for many years into the future.

There is even less optimism in the gold mine developers, at a time when the majors that are making records in free cash flow need new mines to replace their old mines and are struggling to increase production. They are loaded up with cash, which is why mergers and acquisitions are ramping up over the past year.

The major gold miners and mid-tier gold miners need plenty more gold mine developers and even more gold explorers with important discoveries. The cupboard is pretty bare when it comes to gold mine developers with high-quality projects and gold explorers with important discoveries.

Generalist investors haven’t figured out how bullish things are for gold miners, gold mine developers and gold explorers with important discoveries. Which makes the gold stocks from the top to bottom of the gold stock food chain primed to go much higher.

In Closing

I’m very bearish on Wall Street stocks, due to them being priced for perfection and unable to give forward guidance due to economic uncertainty. They have certainly rallied off their April lows, but still have a significant distance to get back to their January highs. This recent rally looks a lot more like a bear market rally than an inflection point where they can go a lot higher.

I’m equally as bearish on US debt, due to the Death Spiral of Debt and the unsustainable cost of servicing the debt, plus the politicians refusal to slash spending. Made even worse by the rolling over of $9.2 trillion of debt this year.

If Wall Street stocks have another leg down in a correction and US debt comes under pressure, which are both highly likely, then the US dollar will also be under pressure. The combination will make America less exceptional for investors.

Making it even less exceptional is that the economic uncertainty has never been as high due to the trade war that is a long way from being over. This is raising the odds of a powerful bout of stagflation that is about to get much worse and it won’t be transitory.

The best place for investors to protect their wealth and fight against constant destruction of purchasing power of fiat currencies is in gold. It is no wonder that gold is trading at or near record highs against every fiat currency, including the world reserve currency. Ultimately, the debt and fiat currency system is broken and gold is the only place for investors to seek shelter.

For those investors that want to outperform gold and grow their wealth, the gold miners (pretty much across the board as the high-cost and low-cost gold miners make remarkable free cash flow) and the gold mine developers with high-quality projects and explorers with important discoveries are offering phenomenal investment opportunities.

The gold bull is in fantastic shape, and the gold miners all along the food chain are coiled springs.

All the best,

Allan Barry Laboucan