Busted bonds and bouncing gold

$40 trillion and counting. Bessent forced to buy USTs to keep yields down. These headlines are undermining the dollar’s credibility which is why gold is now rising strongly.

There can be little doubt that gold has turned a corner. Markets now see risk in the dollar, whereas as recently as last month it was everyone’s safe haven. This dramatic change in sentiment has seen gold rise to positive territory for the year and oversold silver rushing to catch up. So far, the buying appears to be a western phenomenon without Chinese involvement.

Since mid-July gold has risen over $600 to $4590 this morning and silver from under $55 to $69.70. That’s up 16% and 27% respectively in a month. And technical analysts will be turning positive because the gold chart is now in bullish sequence with the price, 55-day moving average, and 12-month MA all rising. The trend is our friend, as they say.

So, why the turnaround?

A notable development is that gold and silver are rising at the same time as the oil price. Oil prices are rising against a background of the US’s oil suppression scheme running dry, with strategic reserves all but exhausted. The inflationary implications are for far higher wholesale and retail prices by the year-end, as indicated by the price of diesel which is a truer reflection of energy prices than oil itself. This chart of diesel is from Business Insider:

The price has risen from $1.94 on 24^th June to $2.67 yesterday — up 38% in under two months.

Diesel is vital for all logistics, and its cost feeds into the costs of everything else. Not only have Gulf refineries been put out of action but so have many in Russia by Ukraine’s drones, leading Russia to ban diesel exports. And this week it is reported that desperate Russia is now forced to import it. Not only has diesel risen substantially in price, but it will continue to do so ensuring a global logistics and transport crisis. And the same is true of jet fuel.

The anticipated inflationary impact on the US economy at the same time as federal government debt crosses the $40 trillion line is causing UST-bond yields to rise, driven in part by foreign selling which appears to be accelerating This is next:

Clearly, these developments are causing concern at the US Treasury which is intervening by buying long bonds to supress their yields. This is a battle we can expect the US Treasury to lose, because these purchases along with evaporating foreign interest add to its funding requirements and problems.

Sanctions are the latest move

The stalemate in the war against Iran has led to threats of tightening sanctions against any country or entity which deals with Iran. These are threats which are effectively toothless, because China, Russia, and the ‘stans in Central Asia, all Iran’s trading partners will simply ignore them. Furthermore, the risk is of turning a military war into a financial one, weaponizing the dollar even further and alienating the dollar from global trade settlement.

Sanctions certainly cause discomfort to their targets, but Iran whose very existence is threatened by America is not going to give in. The crisis for US debt financing is considerably more immediate.

These developments occur at a time when ownership of gold in western capital markets is abysmally low, with physical ETFs representing about 0.3% of the $100 trillion estimated value of North American portfolios. Gold mines represent a further $700 bn, taking total sector exposure to about 1%. To correct this underrepresentation requires a purchase of the equivalent of 6,750 tonnes of gold for every 1% increase in portfolio exposure at current prices. That is two years’ worth of global mine supply.

Clearly, gold and therefore its volatile cousin silver are wildly underpriced for this shift in sentiment against the US dollar, which has only just started. Furthermore, speculative interest remains close to historical lows, as indicated by open interest on Comex.

In summary, the favourable dynamics behind gold are turning very quickly with dramatic consequences for prices, set to move far higher and quickly at that.