If You Build With Gold They Will Come

Social media is a great way to get a feel for sentiment in the market and I have been noticing insightful trends concerning gold as it has blown past $3000 and is on its way toward $4000. Several market commentators, investors and technical analysts are getting scared of heights and trying to time a top in gold.

My immediate reactions are that they are trying to get too cute in a powerful bull market and that they don't truly understand what is driving the market.

In a powerful bull market the pullbacks are mild and end in a short period of time. Catching the top to sell into and then the bottom of the pullback is very difficult and leaves most open to getting whipsawed. The most likely result is they won't catch the top or the bottom and at best will make very little on the trade and more likely to sell then buy at the wrong times and instead lose on the trade, Or even worse, miss a strong rally, it is somewhat of a fool's errand. 

More concerning for investors that listen to these proclamations is that they are getting their information from someone that doesn't really understand what is driving gold. 

The key driver is that there is a Death Spiral of Debt in America and worldwide. Compounding this debt crisis is that the cost of servicing the debt is unsustainable. In America the cost of serving the debt is now over 20% of what comes in from taxes and is over the cost of defense.

There is no end in sight because the politicians in Washington (led by the GOP in the White House, Congress and Senate) want to keep Biden's insane spending habits and increase the debt ceiling by $4-5 trillion. There are absolutely no plans to slash spending to try to get the deficit, debt and cost of servicing the debt down. With Trump and the GOP in control of everything, it is business as usual.

Weaponization of the US dollar caused central bankers to consider why they held so much US debt and US dollars, so they have been decreasing their positions and increasing their reserves of gold. They had really started this process after the 2008 GFC and ramped it up to records in gold buying over the past 4 years and 2025 is likely going to be a new record in the amount in dollar terms, maybe even in ounces bought.

At the end of the day, the global debt and fiat currency system is broken, which is why gold is at record highs against every fiat currency, including the world reserve currency.

Making matters worse is the American leadership is hellbent on slowing the economy toward recession and driving inflation much higher. Their weapons of mass economic destruction are mass deportations and tariffs that have become a poorly timed trade war between America and China, as well as practically every other American trading partner.

Mass deportations take migrant consumers and workers out of the economy. It isn't only those that are deported, others are leaving on their own volition out of fear of being removed by ICE agents. Those that stay in America are fearful of getting caught by ICE agents so they stay home from going to work and shopping. This has caused the economy to slow and inflation to increase even before the tariffs came into play.

Surveys of consumers and business leaders have been showing concerns for economic growth and inflation for several months. Voters showed their angst about these issues in the November election which gave Trump and the GOP a resounding victory. Voters wanted economic change, but didn't really consider what mass deportations and tariffs would do to the economy and inflation.

Even the Fed, which is usually backward looking as they await dots to plot, recognized at their September meeting that their models on inflation had fallen apart and instead of moving down toward their target rate are more persistent than they would like. In addition, since then they have also been forecasting that growth was slowing. So much for Powell's comments that he doesn't see “stag” or “flation.”

Of course they are reluctant to mention stagflation, primarily because they have no tools to fight it. Raising rates to fight inflation will throw the economy, workers and the stock market under the bus, lowering rates to spur the economy, jobs and the stock market will throw inflation under the bus. 

Meanwhile the bus keeps moving and before too long the Fed will have to make a decision whether they throw inflation, or the economy, workers and the stock market under the bus. My guess is they sacrifice inflation, but they may dither on when because there is no love lost between Trump and Powell.

Even more troublesome is the guy driving the bus (Trump) is excited about playing economic chicken and unafraid of economic suicide. 

Nobody wins in a trade war, and consumers pay for it with higher inflation which are taxes on consumers. Nonetheless, Trump is headstrong about fighting a trade war that pits America against every other country, with the most severe tariffs for China. And with the conviction that America has all the cards and no trading partner has any of their own to play. 

The harsh reality for the misguided people that believe America has all the cards comes from the exorbitant privilege of having the printing press for the world reserve currency for many decades. Plus, the lack of understanding of how this and global trade has enabled the American economy to be the largest in the world.

America is a consumer nation that imports stuff and pays for it with overvalued dollars. And in the past, foreign countries would then use the US dollars they received to buy US debt. This kept the house of cards from falling. 

I've heard several market commentators make the argument that the house of cards can never fall because foreigners have no options but to keep buying US debt and sitting on US dollars. This is an American-centric view that ignores the reality that foreign countries do in fact have options.

Take China for example, they sit on over $700 trillion of US government debt, nothing is stopping them from selling which drives yields up, and then taking the US dollars they get and buying more gold. Plus, they can also buy European debt and the Euro.

Why would they do that? Well, Trump's massive tariffs on them will make them realize that they can change whose debt and currency they support and send that elsewhere to build up alternate trading partners. The European zone is almost as economically big as America, if China buys up Euros and European debt, they can easily replace what they lose from the trade war with America.

Trump wants to Make America Great Again (MAGA) when he is running the risk to Make Europe Great Again (MEGA). 

He is under the delusion that trade imbalances are abusive to America and every trading partner is taking advantage of America. Nothing could be further from the truth, America has been able to buy stuff with overvalued US dollars exchanging highly diluted paper for actual real products and services. Made possible by issuing unprecedented amounts of debt to fund their buying spree.

To some degree, almost every major country in the world has been doing the same using debt and fiat currencies to build the global economy. But, this has broken the debt and fiat currency system, which has overwhelmed America and the world with far too much debt and overly diluted fiat currencies that have continuously, for decades, destroyed purchasing power. Hence why gold is at record levels against every fiat currency.

Ultimately, economics has a way of fixing stupid ideas. Like fighting a trade war with every trading partner, and saving the most punitive tariffs (a.k.a. taxes on American consumers) for China and believing wholeheartedly that they have no choice but to bend their knee to Trump.

He has even gone as far to assure Americans that there is a long line of countries willing to kiss his ass (he actually said that) and make win-lose trade deals. This will prove to be more bluster than factual.

He already relented on tariffs to most countries, when the bond market started having issues as investors sold and drove yields up. Which isn't what Trump wants, he wants lower rates so he can keep spending like a drunken sailor.

He has given most trading partners 90 days to negotiate and sign trading agreements. When this all started, he said he wanted new trade deals that balance tariffs, plus he wanted other countries to trade more with America and pay for past imbalances. That by definition is a win-lose proposition that few can agree to even if they wanted to.

How are countries like Vietnam, with much smaller economies, supposed to buy as much from America as America buys from them? And also pay damages for past imbalances? They can't.

The most notable country to come to Washington to discuss trade deals is Japan. They left, with no new trade deal and a sense that the leadership in Washington can't articulate what exactly they want in a trade deal.

Don't be surprised when the 90-day window comes and goes with very few, if any, new trade deals. It takes a lot of negotiating and lawyering up to make trade deals and trying to accomplish that in a few months, with practically every trading partner is an impossible task. Especially when the leadership in Washington thinks of it as a zero sum game in which every trading partner has to lose and America has to win.

While all of Trump's alleged ass kissing by every trading partner is happening, China is not interested. And if Americans and others believe they are sitting back and doing nothing they will be proved wrong.

My guess is that China is already taking their cards and deciding they will play them at another table. By selling US debt and US dollars to buy gold, Euros and European debt. Thus strengthening their reserves of the soundest money gold and also giving liquidity to European countries to replace what they lose from American consumers.

Gold already had a perfect storm due to the Death Spiral of Debt and unsustainable cost of servicing the debt, plus the weaponization of the US dollar. It didn't need weaponization of trade, but it got it anyway.

In order to stop the trade war, either every country will need to kiss Trump's ring and go for win-lose trade agreements or Trump will have to stop the trade war with every country, including China. Even if he does that, it won't change the fact that he has highlighted to every investor, domestic and foreign, that the US bond market has issues.

With GOP lead Washington unwilling to slash spending, the Death Spiral of Debt and unsustainable growth of servicing the debt, the problem is only going to get worse. In fact, much worse this year as there will be an additional $9 trillion of debt that needs to be rolled over from low rates to much higher rates.

The looming question that needs to be answered very soon is who is going to buy all the debt to keep the spending addiction of politicians on the left and right going? Plus buy up the $9 trillion that needs to be rolled over? It doesn't get better as time marches on as the debt that was accrued during Obama's two terms, Trump's first term, and Biden's one term also needs to be rolled over during the next few years.

If foreigners keep selling bonds, which I think they will, then also considering the $9 trillion elephant in the room, plus the spending problem in Washington, I don't think it will be long before the Fed will lower rates and also get back in the QE business. The extreme supply of debt could also bring the Treasury into the bond market which will certainly cause alarm bells to go off to every bond vigilante.

Ultimately, one of things that I don't think commentators afraid of heights looking to time pullbacks and rallies in gold are completely coming to terms with is that the world is heading toward the Gold Standard 2.0.

Which means that gold will continue to grow in the currency reserves of central bankers and will also play an increasing role in international trade.

All of these various factors mentioned earlier are extremely bullish for gold. A final one I will highlight is that currently the debt in America and worldwide is only backed by around 2% with gold. It should be 10% at a minimum. 20-30% would be healthy and 40% or more would be ideal. If it goes to any of those levels, gold is going to be priced at multiples of its current price.

Central bankers positioning themselves will look after the strength in the price of gold and the number of years the gold bull runs. But, for generalist investors, there is a fantastic opportunity to make life changing gains in gold stocks.

The high-cost gold miners are making over $1000 on every ounce they mine and the low-cost gold miners are mining gold for around half the price of what they are selling it for. The gold miners are free cash flow machines that are adding cash to their balance sheets at a remarkable pace.

Gold mine developers with high-quality projects are in scarce supply making them well positioned for rerating of their projects. They are currently trading as if gold was half its current price.

In addition, just when the gold mining space needs more high-quality new gold mines being built to replace what is being mined, it also needs gold explorers with important discoveries. But, there are very few high-quality gold mine developers and explorers with important discoveries in the pipeline.

The weakness in the supply chain means that the supply will be flat to down for decades into the future. Making the perfect storm even better due to strong demand and soft supply.

Generalist investors in the West and East have not recognized that gold miners are free cash flow machines with plenty of cash on their balance sheets for mergers and acquisitions. Or that the menu all along the gold food supply chain is tiny.

Build it and they will come. Gold and gold stocks have been built for life changing wealth creation and the boat is leaving the dock. Soon the only question left for generalist investors will be how fast they can swim to catch up to the golden boat.  

All the best,

Allan Barry Laboucan