Uncle Sam’s borrowing costs were still front-page news on Friday, as the financial media spilled more digital ink editorializing around the prior day’s long-bond refunding, which saw the US pay the most since 2001 to borrow for 30 years.
In the context of things that don’t matter, this matters more than it used to. America’s undergoing institutional decay at an accelerated rate, some of its foreign policy decisions amount to a repudiation of the global architecture that gave rise to dollar hegemony and the relationship between an increasingly autocratic executive and his new central bank chief raises very real questions about monetary policy’s latitude to address inflation which, a string of favorable data points notwithstanding, remains too high.
Long story short, the dollar’s reserve status still means debt and deficits matter far less for the US than they do for any other nation, but America’s pushing it, for lack of a more academic way to say it. That’s one reason I added to my gold allocation on June 26 and then again on July 15. The other (reason) being gold was down 25% from the nosebleed, mania highs in January.
There’s the chart. Before you jump at this ostensible “opportunity,” don’t forget: Gold doubled in the 12 months leading up to the current bear market.
As any regular reader will attest, I despise gold. I’d rather buy Golden Goose any day, and on a lot of days I’ve done just that. Gold has no internal rate of return, it costs money to securely store it (and you will pay that cost one way or another, even if your gold is the paper variety) and it has no intrinsic value beyond that associated with being “scarce,” a trait that’s by no means unique to sun-colored metal.
However, if everyone else believes it’s valuable, it doesn’t matter what I think any more than it matters that you think the dollar’s worthless (which it is; all money’s fictional). Worth, like beauty, is in the eye of the beholder or in the imagination of a community.
Unlike other things I hate (like Infinity SUVs) , I’m not averse to owning gold, and not so much because I’m worried about inflation or the national debt (if that were the case, I’d need a lot more gold than I have), but rather because it does occasionally serve as a decent hedge and will periodically behave like an uncorrelated asset. You do need uncorrelated assets.
Further, gold’s historical track record as an inflation hedge is unassailable, although I’ll gently remind you that lots of other assets would’ve served the same purpose, and in a lot of cases, done a better job of it.
If you ask BofA’s Michael Hartnett, “the trade is long gold” if you’re concerned about fiat money, debt and the madness of the people who conjure them. Gold, Hartnett wrote, in the latest installment of his popular weekly “Flow Show” series, is “still the best hedge against dollar debasement, bond collapse, asset inflation and the capitalist populism versus socialist populism politics of the 2020s.”
The figures above show you the US national debt and the trajectory for Uncle Sam’s debt servicing costs both in a scenario where rates are “stable” (a misnomer here) and in a scenario where five-year US yields fall ~100bps.
I’ve said this before and I’ll reiterate it here: There’s a point beyond which selling debt (or printing money to buy bonds from yourself) to pay the interest bill on debt you issued previously becomes so absurd that even the layperson on the street recognizes the peril and resets their inflation expectations accordingly. At that point, the game’s up.
But that absurdity threshold’s very, very high in America for two reasons. First, and to reiterate, the dollar’s still the dollar. There’s no alternative and no shared myth in the history of the world (save those associated with organized religion) has more adherents. Even amid proliferating doubts about the system’s long-term viability, the USD user community’s so large that the dollar and “money” are effectively synonyms.
Second, Americans are dim, apathetic, too pressed during the work week and too preoccupied with sundry manifestations of star-spangled chintz on the weekends to revolt against a nebulous Ponzi scheme. That weekend preoccupation’s about to go into hyperdrive with the NFL season right around the corner. (Who says we don’t have anything going for us anymore?!)
Still — and I hate saying this as much as I hate the implication — the case for gold’s at least as strong now as it’s ever been with three caveats:
- In my eyes that’s the lowest of low bars, because there’s never a strong case for buying inert metal you’re not planning to build something with.
- You have to be ok with buying something that’s already run as far as gold has. For a lot of investors that apparently isn’t a problem given appetite for AI-related stocks, some of which rallied triple- or even quadruple-digits over a very compressed time frame.
- This isn’t investment advice. Consult your financial advisor who operates out of an office next to a strip-mall Chipotle and loves his Hugo Boss suits.
Coming full circle, the US national debt’s all set to surpass $50 trillion by the turn of the decade, and as Hartnett went on to note, America’s debt servicing bill will rise to $1.7 trillion by the next presidential election on the current trajectory.
“US stocks storming to new highs the same day the government sold 30-year USTs at the highest yield in 25 years ‘tracks,’ as the kids say,” he added.
I have not read about Modern Monetary Theory recently in any media. Could be a study coming which traces the fiscal/geopolitical events against MMT mentions in media?
So I feel we are at the same precipice we faced at the end of the Reagan/Bush era. Extraordinary buildup of the national debt in our effort to bankrupt the Soviet Union as well as finally dealing with the S&L crisis. Enter the democrats of all people to restore fiscal sanity.
I just don’t see a similar scenario playing out this time around. The transition from politics is compromise to politics is war post Gingrich has paralyzed Congress and transitioned previously relatively balanced power to the imperial presidency. Trump is the dictionary definition of using other people’s money. Leverage is good, more leverage is even better. Heads I win, tails you lose.
I am by nature an optimistic person. But my crystal ball is reflecting a dystopian fiscal future. And then I read that you are increasing your gold allocation despite your long opposition to the metal. Oy vey. Need to add whisky to my morning coffee.
I absolutely believe that MMT could work very well in a peaceful world.
Gold mining stocks, and oil.
Gold and oil going up in tandem is usually not a good thing. I hope I’m wrong.
Thanks for the analysis. If there were a dip coming, I will be a buyer of Sun proxy.
Chipotle is arguably more upscale for a neighbor of Eddie Jones….a nail salon and the Hunan Dragon with one token table inside (sans A/C) is probably where comps sit lmao
After gold enjoyed its final leg down, it hung around the $4000 level for a while. It was clear to this old geezer that someone big was unloading a large amount. It was being done in a cat & mouse manner which had “pro” written all over it. It looks like they are done.
I suspect that it was a Gulf State raising money to compensate for lost income and increases spending needs thanks to the Iran excursion. The Gulf states have changed from being a large provider of capital to the world to having their hands out like the rest of us. That’s bad news for many private equity and venture capital firms.
Nice job! Caveat #2 rings the bell for me, but I already own gold that I bought very cheaply a long time ago (in a galaxy far, far away). Although I can see the writing on the wall, I balk at the way gold tends to very quickly shift from a prudent hedge to a speculative frenzy. And as you so rightly pointed out, gold pays no interest or dividends, and it costs money to store physical gold (which is the only kind I personally would buy). One also pays a small premium to either buy or sell gold. That’s right, no free transactions here, the dealers clip you going both ways. Younger investors should perhaps take note of that as well.
Your observation is correct when you talk about coins and small bars where there usually is a premium to buy while the bid = the bid side of the spot price.
Once you move into big boy territory of kilo bars and larger, generally you can avoid much or all of that. Especially when dealers run specials.
I have never bought or sold a kilo (of gold), but I have bought gold and silver from big dealers like Apmex and others. They give you a better deal on bigger buys, especially when business is slow, but I have never seen them waive their fees altogether, especially during speculative runs. On the sell side, and during a run, you may pay close to no premium, but again, I don’t think I have ever moved more than ten-ounces at one time.
H, you never talk about about buying real estate (houses, farm land, etc) instead. Any thoughts?
Oh God, are you kidding? I talked till I was blue in the face about property ideas in 2022/2023. I was going to buy a getaway condo in Indy (or any NBA city) at one point, a place in Asheville (which thank God I didn’t do), I looked at Milwaukee, Charlotte, made offers in Chattanooga, Nashville, Greenville and just on and on. I even thought about unimproved land before a couple of readers gently advised me against it. Ultimately, I’m happy with the properties I have for the time being. I’ll sell them one day and buy two news ones, but I can’t honestly see myself owning more than two properties. It’d drive me crazy.
What was your thinking behind the “any NBA city” criteria? You a fan or you like short term renting nice apartments to rich fans who want to go see a game and splash out?
I like the NBA.
Dang, why don’t we get any heisenberg nba analysis? The playoffs this year were the best in years. I’m just thankful both OKC and Argentina went down this summer. Those teams are both insufferable.
Maybe the Kitsch Register needs a sports section.
You got a team?
I remember those posts.
We’ve done well since the turn of the millennium with modest properties in strong western urban and resort/lifestyle markets, getting up to 4 properties for a few years and milking the tax benefits and taking advantage of a few 1031 deferral opportunities (like the Trumpfather taught us, but without stiffing any contractors)…but think that ship has sailed. Your 2 property max rule seems about right now!
I do not recall the post you refer to, probably because I wasn’t fully subscribed. But I do think that the point is that you cannot handle several properties because it would drive you crazy. But if you look at this from 10000 meters of altitude and think about it with a timeframe of about 10 years or more, houses or farms are a compelling investment, at least I’m making a living of it. Who needs gold? Who needs a house? Who needs food? Just thinking, and of course I do not live in the US
yeah it wasn’t just a post. it was probably dozens of them and dozens of comments. i used to post Zillow listings in the comments all the time
Ok, sorry that I didn’t see those many post, but that’s not so much the point. If having properties drives you crazy, ok, but that does not make them a less interesting investment than useless gold, I think
Apropos last name for someone recommending real estate 🙂
I think there’s a bit of a language barrier getting in the way here, Andreas. I never said property was “less interesting” than gold. I said the opposite. Indeed, anything‘s more interesting than gold. On farm land, I wouldn’t be a good farmer, I’m afraid. And as far as owning more than two properties, I guess the more accurate thing to say is that I simply can’t afford to own more than two of the sort of properties that I like to own. I like renovated, upscale loft spaces in decent-sized “cities” (scare quotes because I’m talking second-tier cities at the largest) and four-sides-brick/stone single-families in HOA neighborhoods because of the (relative) liquidity. Owning three or more such properties in America would entail spending / financing several million dollars, “several, several, several” millions if you’re talking five and up. I have no wife, no significant other(s), no children and don’t fly on planes. So, even if I had (or was willing to finance) several millions of dollars to purchase three or more properties, I’m not sure what I’d do with them. It’d be impossible for me to enjoy them. But if you have, you know, $10 million+ in cash and you want to play monopoly (or be a farmer), I think property and farm land’s as good (or better) an investment than any other, particularly if you have family to share it with and pass it down to.
Incidentally, this kinda “explains” (for lack of a better word) the lifestyle delineated in the Kitsch Register articles. I’m 42 years old, I have more money than I need by a fairly (but by no means excessively) wide margin, and yet not nearly enough money to do anything extraordinary, I have no schedule, no wife, no kids and thereby no concerns about “future generations.” So, while my lifestyle can come across as some stripe of lavish, it’s really not. Not at all. It’s just what almost anyone with my circumstances would do: You put six figures in an investment account or two, put five figures in a savings account, get yourself a couple of decent properties and then you just kinda, you know, wander around and do a not-very-decent impression of being rich, which is to say you get yourself into a mid-range German luxury car, buy designer clothes, go out to eat and put whatever’s left over each month in Vanguard ETFs. Hardly the life of a hedge fund manager or even a sell-side chief equity strategist with tenure. Don’t get me wrong: I’m very grateful and very lucky in all sorts of respects, but if you actually read what I say in the Monthlies and on Kitsch Register and think about it for a second, what you’ll discover is that despite how it sounds on a quick skim (and this applies both to my legend-building from my twenties and my current life), the particulars on a close read by no means suggest anything especially epic or extravagant about my lifestyle, neither past nor present. There are a lot of adjectives you can use, but “epic”/”extravagant” aren’t two of them. So, to tie this with the discussion above about property, I’m not a guy who wakes up and thinks, “Maybe today’s the day I’ll buy that ranch in Montana I always wanted. After all, it would be awesome to have my own bison herd.” It’s more like, “Maybe today’s the day I’ll get that new-season Celine hoodie I’ve been wanting, and maybe, if the market news flow’s slow this afternoon, I’ll go swap out this C-Class AMG for that black on black 530i I saw when I was getting my tire pressure adjusted last week.” Fun? Sure. Epic? No.
H — Happily, from my prospective, many of your posts clarify one or two small points that cause me to think, oh, I’d have never guessed that. You are one of the very best writers I read these days. You have absorbed and are conversant in a mountain of info that teaches me, even with all my education, something new every day. I use what I have learned here to enlighten myself and protect myself against my own ignorance. Your intelligence is my “other peoples’ money.” Thanks for sharing.
However you choose to describe and characterize your financial situation; your published stories about your life journey and your self reflections are always a fascinating and thought provoking read.
Likewise, your observations about life, people, humanity, politics, etc. are way more interesting than anyone else I am aware of.
Thankfully, you are wealthy enough to carry on with H Report and related publications.
Healthy enough. Remember: I’m over 40 now. We’re praying for health not wealth at this point. 🙂
A concern here would be the recent resurfacing of the Fort Knox visit to check if the gold is still there. Trump and Bessent were hot on this topic at the outset of Dystopia 2.0, then dropped it like a hot sun-tinted rock. But Rand Paul decided a visit was necessary last week along with a janky pitch for the merits and virtue of holding it.
Thank you for these last 2 posts, I just red them a few minutes ago. I agree that managing a farm is not for anyone, as is renting properties, but some of us may do well. And I thank you for all your posts about AI spending, it just makes me wonder, I guess like most of us, is it really worth it? My “communications” with Google say No, for now. But I am 63 years old, so ….