A TALE OF TWO GOLD MARKETS / MACLEOD FINANCE

A tale of two gold markets

The shakeout in gold and silver markets was triggered by Trump’s landslide. All US markets are responding with conventional confusion, ignoring the contradictions and dangers in Trump's polices

ALASDAIR MACLEOD

To put gold’s $200 decline in perspective, the technical chart above shows a normal bull market consolidation testing the 55-day moving average which has generally provided support since 2023. 

Will this support hold? 

We look at the dynamics behind current events.

Clearly, with a strong case for higher inflation being made by Trump’s trade tariff policies, we can say with a high degree of certainty that bond yields are going to rise. 

Here is the chart of the UST 10-year note:

Once it clears 5%, it looks set to run considerably higher.

There is a convenient myth that rising interest rates and bond yields are bad for gold. 

This error stems from the 1981—2002 bear market in gold, when physical gold bearing a leasing rate of less than 2% was used as the basis of a carry trade leveraging up into US Treasury bills yielding multiples of that. 

Indeed, the legacy of this gold trade, which has gone missing into markets, is still likely to come back and bite participating governments who were glad of the leasing income at the time.

When gold is in a bull market, it is an entirely different matter. 

Back in 2020, T-bills yielded close to zero and gold was $1500. 

Today, 3-month T-bills yield 4.54%, which demolishes the yield relation myth. 

Furthermore, between 1970—1981 prime rates soared from about 6.5% to 20%, while gold rose 24 times from $35 to $850.

So we know that the hit on the gold price is based on a myth. 

But so long as the myth persists, paper markets will attempt to behave accordingly. 

But those that don’t buy the myth are foreign central banks and their governments, particularly in Asia but also in Eastern Europe and elsewhere who are grabbing all the physical that comes available. 

For them, this is a heaven-sent opportunity to take in more physical — if it is available. 

This is a problem, for all the action is in paper markets being driven by those with a different agenda: establishment actors with no experience of current market conditions.

Interestingly, the strain between bullion and forms of gold credit are already showing. 

Comex stands-for-delivery this year so far amount to 129,335 gold contracts, or 402.27 tonnes. 

Clearly, while the bullion banks, swaps, and hedge funds play their games increasingly other players see mounting dangers.

The real problem for the dollar is the enormous mountain of Federal debt, currently at just under $36 trillion. 

Combine that with a new inflation problem driven by higher tariffs, rapidly, shortening average maturities, and an outlook for rising (not falling) interest rates and bond yields, and the US Government faces escalating funding costs. 

In other words, it is in a debt trap from which the only escape is to not cut interest rates, but the budget deficit.

Cutting the deficit is easier said than done. 

Libertarians and others make the mistake of thinking it is simple: it’s not. 

Political reality, even for Trump aided by Elon Musk makes it very difficult, and as a best case it will take time and legislation which has to pass through both houses driven by vested interests.

Meanwhile, foreign holders of some $32 trillion and underlying dollar-denominated financial assets are far from convinced about Trump, who they see as bringing uncertainty to the world economy, not resolution. 

The fact of the matter is they see not just the US$, which Steve Hanke describes as the least dirty shirt, but debt traps emerging in the euro, yen, and sterling taking out all of the G7’s currencies.

So what are these sceptics doing? 

They are getting the hell out of currencies, which are credit, into the sanctity of real money, which is gold. 

And far from higher interest rates being a headwind against the gold price, they threaten an increasingly imminent decline and collapse of all credit denominated in these currencies and the currencies themselves.

I return to the technical chart at the head of this post. 

Gold could go lower towards the longer-term moving average, of course, but these are paper prices leading to an increasing squeeze on bullion liquidity. 

Given what lies ahead, only a fool would sell bullion to the desperadoes seeking to close their shorts.