Gold and the reflation trade
Trump is planning massive reflation in 2026, and other G7 countries will follow. It will undermine the fiat dollar, leading to higher bond yields and higher gold prices.
ALASDAIR MACLEOD
At the US-Saudi Investment forum, President Trump publicly told his treasury secretary that he must fire Jay Powell, accusing him of being incompetent.
He was only half joking, the other half being deadly serious.
Trump is a spendthrift, a property developer to whom cheap finance is his lifeblood.
And his advisors see a stalling economy, demanding stimulus.
Trump’s response is to pay $2,000 to every US citizen labelled as tariff dividends.
We can expect other G7 countries to follow suit, leading to a global reflation move, undermining the value of their currencies
At the same time, a deteriorating budget deficit is forecast by the IMF to hit 7.9% of GDP in 2026.
But there is a perfect storm brewing in bond markets.
Not only is the yen carry trade being undermined by their bond yields soaring higher, but Trump’s money-printing is bound to undermine the outlook for the dollar’s purchasing power.
What this means for US bonds — and therefore for bonds in other currencies — is higher yields, most notably for long maturities.
The chart below is of the Japanese (JGB) 40-year bond yield, which from an habitually low level now yields more than its eurozone equivalents.
If you bought this bond in August 2019, you would have lost 74.5% of its capital value.
Next is the UK ultra-long gilt:
This gilt’s yield has yet to fully escape its consolidation phase, which it is set to do.
This is very bad news for the UK Government because it has enough momentum under it to point to far higher yields, dragging the entire yield curve higher.
Germany’s 30-year bund tells a similar story.
While lagging the others perhaps, the US long bond is heading in the same direction:
To put the last chart in perspective, there follows the 45-year history of the 10-year Treasury note yield:
Gold is the ultimate hedge
Even before the credit bubble bursts, we can see how the expansion of government debt, and therefore credit is becoming limitless.
It is increasingly difficult to argue that we are not in the last chapter of the fiat currency era, and that political policy has no option but to debauch them entirely.
Ironically, it is the money-printers themselves who understand the final outcome, which is why central banks have been selling fiat currencies for gold for the last five years or so.
And shortages of bullion against a background of new mine supply and scrap recycling totalling perhaps 4,500 tonnes suggest that central banks and their governments are hoarding gold at a faster rate than officially admitted.
China has gone as far as laying plans for its version of a new Bretton Woods agreement for trade settlement purposes, not securing the dollar’s purchasing power but that of its yuan.
The Chinese understand the role of true money without counterparty risk, and the message is spreading to other governments and their central banks in the entire SCO/BRICS community, along with others wishing to join.
The message to us ordinary plebians: follow the money and get out of credit, whose value is condemned to track that of the 1920’s German reichsmark!
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