It almost feels like Groundhog Day when every week the…
It almost feels like Groundhog Day when every week the words “Gold hits new record” flash on my phone’s screen along with my 7 am alarm.
What’s happened this week now? Have we finally fired nuclear missiles at each other? You’re probably wondering.
Not quite but Trump did attack the Chairman of the Federal Reserve bank saying that he was “Mr Too Late” to cut interest rates and by extension challenging the independence of the central bank. So not much happened, pretty standard stuff these days.
But what isn’t so standard is that US assets and their “safe haven” nature are being challenged. Investors are looking for safety and some remnants of normality by allocating money to safer assets such as gold and even European bonds such as the German Bund. No surprise, therefore, that gold has been making headlines almost in tandem with Trump.
As mentioned in my earlier post about why central banks have been ramping up their gold purchases, gold has “sanction-proofed” foreign reserves and allowed nations to still purchase goods should they become subject to dollar controls. This notion becomes more powerful under tariff uncertainty and fragile geopolitical relationships. You just never know when Trump decides to declare war, economic or otherwise, on you. Gold, therefore, is a great way to hedge the unpredictability of Trump.
It may come as no surprise that the top 3 biggest purchasers of gold are: Russia, China, and Turkey. The three nations who are most likely to become subject to dollar sanctions. Well, one of them already has.
China is an interesting one. They are the second largest holder of US Treasuries and have the second largest gold reserve in the world. So, if you’re China you don’t really want the US to default on their debt or see the dollar crash and you don’t really want the gold price to drop drastically either.
However, the ramping up of the trade war with China slightly changes things. Before, China had a vested interest in a strong dollar. A strong dollar encouraged the US to continue buying Chinese goods and China likes this because it caters towards their export engine economy. But, with the escalation of the trade war with China, there seems to be less incentive for China to continue buying US Treasuries which have lasting implications on US borrowing and the dollar. The impact on bond markets ultimately made the President blink because America borrows so much to fund their expenditure and despite Musk and DOGE’s efforts, variation in Treasury yields will inevitably weigh on the US economy. In addition to the tariffs, which Goldman Sachs estimate will hit the US the hardest, it brings into question the ability of the US to pay back the debt it has issued.
The bottom line is this: look for reliable safe assets.
Such assets may be the German Bund or it may be gold. I heard one investor say that this year is a good year if you don’t lose any money. This investor probably fell out of his armchair when gold reached $3,500.
From: “Gold hits $3,500 for first time as Donald Trump’s attack on Jay Powell rattles markets” FT
At its record high, gold is up 28 per cent year to date bearing in mind its only April. The S&P 500 is down 6.75 per cent YTD and whilst it is likely it will rebound, it’s also likely we will see further volatility during Trump’s term. This ultimately plays into the hands of gold.
What does this mean for your holdings?
There are strong structural tailwinds for the price of gold with underlying debt and safety issues in the US as well as the increase in gold holdings by central banks. At the moment, I am viewing any ownership of gold as being backed by large central banks such as China and Russia since they have a vested interest in the upwards movement of the gold price. We may potentially see many other central banks increase gold holdings as market and political volatility inevitably kicks in with Trump at the helm. The key thing is this: if investors reduce their exposure to America, seeking a flight to safety, and reallocate their capital elsewhere, where does it all go?
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