War and Gold: When will gold pivot?

 

To figure out when gold will exhaust this downswing you have to understand the mechanics of the war's effect on the economy.

First the war will continue because it is in the best interest of 2 of the parties to continue - Iran because the war unites a fractured country against an external enemy and Israel for the same reason.  It is in the US interest to end the war - but it can not do so without admitting defeat, or just leaving the Strait of Hormuz under Iran's control, which it will never do.

So the strait of Hormuz will remain closed and oil and inflation will soar.

Right now this is the war's main economic thrust - sending oil higher, debt higher, and thus long rates higher.  The rising oil price and the rising rates weigh on the gold price for short term trading reasons.  As rates rise, money rotates out of gold and into fixed income.  Algorithms have been written that effect this automatically.  In the short run the swiftly rising inflation concerns cause this rotation.  And gulf sovereign wealth funds must sell some gold to bridge the gap of the loss of oil revenues from the closed strait and destroyed infrastructure.

In the longer run - meaning months (not years) - the swiftly rising debt combined with the US militaristic policies that repell the rest of the world from buying our debt are stronly supportive of a higher gold price.

At some point as rates and debt rise, a debt crisis becomes ever more of a certainty.  Thirty trillion dollars of debt financed at under 2 percent are going to have to be refinanced this year - 2026 - at over 4 percent.  US Banks are carrying trillions of dollars of underwater loans in commercial real estate, in delinquent consumer debt, and in high yeild debt incurred by zombie corporations taking advantage of compressed spreads during years of ZIRP policy.

The incoming Warsh Fed has already comitted to easing.  They will receive little push back from the financial community in the face of this incipient debt crisis. Many hedge fund billionaires like Stanley Druckenmiller (who hired and trained Warsh and Treasury Secretary Bessant at his hedge fund) and Ray Dalio, are putting out videos warning that this debt crisis can not be avoided even with Fed easing.

But the Fed easing - even in the face of drastically elevated inflation - especially in the face of drastically elevated inflation - will certainly provide the fuel for the next - violent - leg up in gold.

As will the inevitable countless trillions in bailout money that the Fed will havee to provide to support the banking system.

The problem as an investor is if you wait for the easing you'll miss the move.  Because gold will undoubtedly move well in anticipation of this certain easing.