I hate to be “that guy.” The guy quoting gold prices and complaining about budgets and deficits on the way to intimating that the money’s worthless.
And, as any longtime reader will attest, I’m definitively not that guy.
However, I have spoken over the years about what I call a “laugh threshold” beyond which governments risk a loss of public confidence in the nation’s unit of account.
The laugh threshold’s a theoretical construct. I can’t tell you where it is for any given country, nor can I make any sort of checklist enumerating steps on the way to the danger zone. This is complicated by the obfuscatory nature of programs like QE which, whatever they’re good for, look suspiciously like debt monetization to people who bother to understand the basics.
While I can’t tell you when, precisely, the electorate in developed economies will start to ask existential questions about the viability of the system (and here I mean the typical voter, not die hard gold bugs and Bitcoin purists who ask those sorts of questions every day), what I can say is that the loss of institutional credibility, acute legislative dysfunction and the breakdown of civil society are pushing us closer.
Although many of the world’s small, highly-advanced economies still boast stable governments seen as generally credible by the body politic, I dare say most of the major Western powers (and remember: “Western” isn’t necessarily a geographic term in this context) don’t. Certainly, US voters don’t have much faith in their institutions anymore, France is in the throes of a seemingly interminable political crisis (with very serious ramifications for the finances of a non-monetary sovereign), the UK’s a basket case (just not as much of one as the US), Japan’s unstable (or as unstable as post-War Japan can be), the same’s true of Germany and on and on.
Even Canada’s grappling with what, for Canada, counts as divisive politics, although Donald Trump’s threat to annex the nation did wonders to rally Canadians around the flag. (In that sense, at least, Trump really is a great unifier.)
Institutional credibility crises aren’t always accompanied by fiscal emergencies, nor vice versa, but… well, suffice to say it’s not a coincidence that many of the world’s major economies are struggling with both in 2025. Those struggles are reflected in steeper yield curves across developed markets. (As a quick aside, we’ve seen some steepener unwinds in recent sessions in and around a spate of poor US labor market data, but that obviously doesn’t change the broader narrative.)
Of course, there are idiosyncrasies to take take account of. In Germany, for example, a stepped-up commitment to defense spending is a big part of the story at the long-end of the country’s sovereign curve, but that too is related to the rolling crisis motif: Berlin, the global bastion of fiscal rectitude, is prepared to loosen the purse strings in order to safeguard its territorial sovereignty.
To me, the figure below says more about all of this than perhaps any other chart you might be inclined to draw.
The chart, from BMO’s rates team, traces the evolution of 10-year US yields — which is to say the benchmark of all benchmarks — since the onset of the last half-dozen Fed rate-cutting cycles.
See anything peculiar? “The current cycle marks the only normalization campaign of the last six in which 10-year yields haven’t closed below the departure point of the first cut at some point during the cycle,” BMO’s Ian Lyngen remarked. Even with the recent rates rally, 10-year US yields are 30bps higher than when the Fed cut this time last year. At one point (in January), they were 100bps higher.
Whatever happens from here — and without wanting to delve into the dark realm of domestic US politics at yet another delicate juncture — that’s a reflection of America’s overlapping institutional and fiscal credibility crises and so too is gold’s monumental rally.
I don’t like — let alone love — gold as an “investment.” Mostly because it isn’t one. An investment I mean. It has no internal rate of return. But speculative though it is (and in some sense, the scope of gold’s two-year rally only serves to underscore the speculative characterization), “barbarous” bullion’s up almost 40% in 2025 on top of 27% in 2024.
Autumn of 2022 marked “peak Fed hawks,” if not peak Fed funds. That’s when the Committee completed a succession of 75bps rate hikes. Gold was $1,630 give or take when the Fed delivered the fourth such “triple-stack” (if you like). This week, gold nearly reached $3,700.
As the figure shows (and I realize most of you have seen the chart more times than you probably care to this week), gold also hit a new record in inflation-adjusted terms.
Capital allocators “are entering a period where they are justifiably concerned about the levels of both deficit spending, as well as questioning central banks’ priorities and willingness to truly fight inflation,” as one PM told Bloomberg.
Much as it pains me: That’s unequivocally true. Whatever you want to say about the source of demand for gold, it’s responding in no small part to the perception of institutional and, if we’re honest, societal breakdown across the developed world — across hard currency-issuing economies.
If the US (the dollar), the UK (the pound), Germany and France (the euro) and Japan (the yen) all suffer from acute credibility crises simultaneously, what are people supposed to hold? The loonie? The aussie? Maybe. The franc, sure. Bitcoin for the bold. But really, just gold.
As the figure above from BofA (tallying EPFR’s flows data) shows, gold funds saw their fourth-largest weekly influx on record this past week, and the only three larger weeks all came quite recently.
Caveats are in order, not least of which is that gold’s overbought (~80 RSI). And as I never tire of reminding readers regardless of how irritable this makes the gold fans, you can’t do anything with gold. You can’t eat it, burn it nor live in it. And this is the 21st century — you can’t buy anything with it directly either, or at least not expediently, in the normal course of regular people’s business. (Can you buy a Lamborghini in physical gold? Sure. Maybe. Probably. Can you buy a Honda Civic with physical gold? No. Certainly not.)
The usual provisos aside, bullion’s having a moment. And BofA’s Michael Hartnett summed it up best. “Gold’s a hedge against anarchy,” he wrote. “While the gold rally has flipped from a quiet bull to a noisy bull, gold will rise further.”
[Editor’s note: In response to multiple reader requests over the past two years, I’ll be opening up the Weeklies to comments from here on out. With more than 90% of subscribers now on the subscription tier which receives the Weekly, and with the rest set to convert by year-end, there’s no longer a tier-based rationale for sequestering the Weeklies away in an obscure section of the site. In addition, it’s come to my attention that when sent directly to inboxes, in full, the Weeklies tend to be forwarded. I don’t mind a little of that, but based on anecdotal evidence, it’s becoming too pervasive. So from now on — in consideration of those factors — I’ll be posting the Weekly directly to the front page of the site on Saturdays. This approach will have the added benefit of creating a Weekly archive that you’ll be able to access directly on the site, which is something else readers have long requested.]
Feature request, I want to know if someone replies to my mostly useless comments.
I second this! Ditto some way to access Recent Comments that’s more than just a sidebar with 4 links.
Replies to your comments will show up under your comment. Just need to remember to check back later 🙂
Sure, but who has time for that?
Wait–
Higher inflation, lower short rates are a priori a promising environment for gold. Add CB reserve diversification, market bubbleliciousnessification, and USD weakness. One doesn’t need to be questioning the stability of the West. But if one is . . .
That’s exactly why I bought gold.
Just what I was hoping for, a “what if” hedge discussion. Thanks as always Walt!
For sure an 80% reading on RSI is case for some concern, but that will only matter when the gold rally peters out. Than it will be used to “explain” why the metal is selling off. In other words, following the usual pattern seen in all markets.
In the meantime, as our Dear Leader is apt to point out, rallies often continue for weeks and even years despite being over-valued by conventional measures. Perhaps today’s relentless surge in mega-cap tech stocks falls into that camp? Those who stand in the way of these rallies just get run over.
A relevant real life example: I was a spot silver trader at a major dealer/market-maker during the late 70s rally in silver which the Hunt brothers helped along. As the metal steamed higher, the RSI measure happily sat above 95. When margin calls helped fuel the relentless selloff which followed, the RSI stayed pinned below 5 for months and months.
I have owned gold for twenty-five years and I can’t stand the hype it’s getting right now. As an inflation hedge, it should comprise maybe 5-10% of your portfolio. People are buying it now as if it’s crypto. It is a good “fear gauge” (and fear mongering is usually how hucksters on YouTube and late night TV try to sell it to you!) But, if we ever get to the point where the dollar actually collapses, water, food, and gasoline will be likely be your most valuable commodities (think: “The Road Warrior”).
I am sure people are making money on it, and likely they will make more, but at $3,700 an ounce, it is overvalued. Since February of last year, gold is up something like 75%. That is not a direct result of inflation, QE, or currency debasement, it is mostly speculation.
Don’t forget ammo. 9mm and 12 guage availabilty and pricing has been a good fear gauge sine 2015.
I actually thought of that, but I chose not to go there as I was trying to avoid sounding like one of the “hucksters” I mentioned. My experience is that buying gold can lead to buying silver, and buying silver can lead to buying “prepper” supplies, guns and the like. It’s not a rabbit hole you really want to go down.
Just use as an indicator of the mood in Magaland. Ahead of the 2020 vote, 9mm shells reach $1 each at the few vendors with stock and short barrell shotguns (popular as a home defense weapon) were totally unavailable.
Gasoline begins to degrade in 3-6 months. Even with stabilizers, its shelf life is 1-3 years at best.
Solar panels and batteries, that’s what you really need. Well, that and ammo, like derek said.
I thought about this when living in earthquake country – if a massive disaster strikes and everyone is fending for themselves for weeks and months, what will be most valuable to have? Besides the obvious of guns, food, water, gasoline?
I concluded you’d want to stock insulin and baby formula, for bartering with the most desperate – or generously providing, depending on your moral character.
Then we had a very big earthquake and there was no particular difficulty afterwards in getting food, water, gasoline, insulin, baby formula . . . or any particular need for guns . . . and my interest in “prepping” faded.
After the fires in SoCal earlier this year, SoCal Edison shut-off our power for three-days while the Santa Ana winds were just howling. Our most valuable supplies then were: candles, flashlights, batteries, and Cyalume light sticks; canned goods (as our gas was still working); and a small Jackery power station we used to keep our phones charged. Even my laptop was rather limited as our wi-fi provider was knocked off-line as well. We have one neighbor with a Tesla Power Wall, and for those three-days (nights) she had the only lights on for as far as the eye could see.
Everything in the universe is cyclical. After reading the story above, you get the feeling that capitalist democracies in the so-called West are coming to the end of some sort of post war cycle, as other countries have throughout history – tired, hesitant, lacking conviction, conflicted, bloated, debt ridden, with social unrest or anomie and inequality. We have all the markings of a Paradigm Shift, as per Thomas Kuhn; but who knows what the next iteration holds and how to navigate it – beyond holding gold.
Woops . . should have referenced Joel Barker.