Gold, silver and Bitcoin: canaries in the economic coal mine?

Gold, silver and Bitcoin: canaries in the economic coal mine?

Will Trump heed the markets? Gold is setting records. Bitcoin continues to be above $100,000. Silver is up more than 70% this year. Trump was confident – maybe too much so – that the sheer size of the American market would force every country in the world to heel and bow to his tariffs. Their exporters would pay the tariffs and we would become “rich as hell”. Surprise. Not happening. Trump’s response is that of losers saying “wait until next year.” He says that manufacturing is going to come back. Wrong. Manufacturing and the complex supply chains are not coming back. The president is a short timer and the hundreds of billions of dollars needed to do what he wants are not forthcoming. Instead, agreements are being written among other countries excluding the US. China is finding other markets for its goods and those manufacturers who are making US specific goods are going to have to retool for those other markets. Somehow I don’t think that much of the America-specific goods will sell elsewhere.

The president’s policies are tanking the dollar. Early on he expressed a desire to lower the dollar’s value in world markets to discourage imports by increasing their prices and boosting exports. He has succeeded. Commerce secretary Lutnick – not one of my favorite people – defended the weaker dollar saying “the dollar declining sort of softens tariffs completely.” Of course, but decreasing imports is contrary to Trump’s other insistence that that foreign exporters will pay the tariffs thereby not affecting the demand in the US for imported goods. Yet foreigners are using the cheaper dollar to buy more gold and silver. I am sure that they aren’t complaining. Foreign governments are decreasing their dollar holdings and are buying gold. The dollar is no longer a “safe haven.” What is interesting is that the president has changed his tune a bit when he says that he is “never going to let the dollar slide.” The only way that could happen is “if you have a dummy” as president. Whoops! But the dollar is at two year lows and no stoppage in sight . What now Mr President?

The president had first said that the Fed should lower the Fed funds rate because there was no inflation and to help bolster a flagging job market. He then later emphasized that if the Fed lowered rates, the interest on the national debt would fall allowing him to keep up government spending. Well inflation is rising and the president and Treasury secretary Bessant seem to not realize that a falling Fed funds rate will actually increase the cost of financing the national debt. Only 21 percent of the debt is in short term Treasurys and only that portion will fall if the Fed funds target rate falls. The increase in the money supply will further increase inflationary expectations calling holders of longer term Treasurys to demand higher returns. This will increase the debt burden rather than decrease it. The sliding dollar also complicates Fed policy in that If the dollar declines further, the Fed will be pressured to hold the Fed funds rate steady or even increase it through the end of the year. The October meeting of the Open Market Committee should be interesting.

The dollar slipping as a safe haven? What has Trump wroth? Trump’s policies have weakened the dollar with the dollar falling around 10 percent. That is intentional. A weaker dollar means that exports are cheaper and imports are more expensive. Since the tariff negotiations have resulted in US tariffs on foreigners being higher than foreign tariffs on the US, then imports are curtailed while exports are supposed to rise. US multinationals should be delirious. They should be able to export more. They would have less competition domestically which will allow them to raise prices. And when the proceeds from foreign sales are repatriated into dollars, they will get back more dollars than before Trump’s actions. The president knows this. He has said “You make a hell of a lot more money with a weaker dollar,” he told reporters recently. “When you have a strong dollar, you can’t sell anything. It’s only good for inflation, and it’s good psychologically. It makes you feel good.” BTW, the 100 largest companies listed on the tech-heavy Nasdaq exchange generate about 45 percent of their revenue abroad. So what is it? A weaker dollar or a stronger dollar? I don’t think even the president knows which he prefers or does that preference change daily?

The high tariffs and the weaker dollar cause foreign capital to start flowing to other markets. Is there a reason to keep investing in the US dollar? Can the weaker dollar keep the dollar as the world’s reserve currency? The answer is likely yes but to a lesser extent. There is really no currency in the world to replace it. But as canaries are used to signal danger in coal mines, gold may be the canary in the US economy’s coal mine. Gold prices may be foretelling real turbulence in money and financial markets leading up to the mid-term elections. All that is happening now in the economy due to the president’s policies and will remain due to his stubbornness. His mantra of “wait until next year” may spell trouble to the republicans. The democrats have no message other than “resist” but the impact of the president’s initiatives may be enough to give the House back to the democrats.

The markets fear that the president will try to inflate the country and increase the national debt. Gold and other fixed valued assets become a safe haven as investors and the public flee the falling dollar. By 2034 most forecasts have the ratio of GDP to debt at over 125 percent. Only those who work for the president have this ratio falling. Greece anyone? Trump’s relentless attack on the Fed’s independence only enforces the market’s perception that Trump will try to inflate away the country’s debt and exacerbates the run away from the dollar.

These are basic concepts that virtually every finance student knows. But apparently the president thinks that his policies can prove to be the exception. Maybe the president will change course but I am not holding my breath. Again, if you disagree with any or all of this please counter these points. I would like to know where I erred and if I am wrong.

Lastly, congratulations to the president on his Gaza peace agreement. No other politician could have pulled this off. Getting Turkey, Egypt and Qatar to force Hamas into an agreement that they did not want was masterful. Let’s hope that the peace holds, that Israel will stop its aggression in the West Bank and that the Palestinians can be ruled by groups other than those that advocate for the eradication of Israel.