Gold’s Second Act Has Begun

Donald Trump just made Americans an offer. And it tells you everything you need to know about where your money should go next.

Last Wednesday night in Dallas, the US President stood in a half-full stadium and promised every American adult a cheque for US$5,000 (about $7,000 Aussie).

The catch?

Republicans must hold Congress in November. The total bill comes to a whopping US$1.4 trillion.

Where does that money come from?

Nobody asked. Nobody ever does. Washington will borrow it. And the Federal Reserve will, one way or another, help print it.

That’s why the debasement 
trade is back on…

The thesis is simple enough.

When governments spend money they don’t have, they cheapen the currency. Smart money then flees paper and buys real stuff. Gold. Copper. Land. Oil.

Anything the Treasury can’t create with a keystroke.

Investors want hard assets over paper promises. That’s been one of the central drivers behind our current resources boom.

But the latest clue comes from the gargantuan bond markets.

Bonds are the world’s lie detector. Right now, the detector screams.

The yield on the 30-year US Treasury recently touched 5.36%, a 19-year high. The 10-year is a smidge off 5%. In Japan, the 10-year yield poked above 3% for the first time in 30 years. Britain just sold 30-year debt at its highest yield since 1998.

Investors are demanding more to lend to Uncle Sam than they have for three decades. They see the never-ending deficits. And they see a President mailing out cheques to win votes.

Treasury Secretary Scott Bessent sees it too. In August, he doubled the Treasury’s bond buyback program.

Think about that. The government now prints money to buy back its own debt.

That’s not a strength for the US economy.

Gold’s Second Act

Which brings me to gold…

Gold peaked near US$5,589 an ounce in January. Then it fell hard, at one point more than 20%, into the US$4,000–US$4,100 zone. That sent some of the gold bugs quiet.

A similar situation played out in 1976.

Back then, gold ran from US$35 to near US$200 in four years. Then it crashed by almost 50%. Everyone called it over. But gold turned around and rose eightfold to US$850 by 1980.

The second leg was where the real money was made in the 1970s gold bull market.

And I think we may have just lived through the modern version of that correction. And the evidence says the bottom is getting close. Look beyond the price volatility, and you can see buyers are getting set.

In August, gold jumped almost 10%. Investors poured US$18 billion into gold ETFs, the second-biggest month on record. Total holdings hit an all-time high of 4,189 tonnes. Futures traders lifted their net bets on higher prices by 39%.

Here’s the clincher

On Monday, the People’s Bank of China reported its August gold purchases. It bought 650,000 ounces in one month. That’s the biggest buy in nearly three years, and it’s the 22nd straight month of buying.

China now holds about 2,366 tonnes. Yet gold still makes up just 8% of its reserves. The US figure? Around 70%. Beijing has a long way to go, and it knows it.

So, why is China buying gold so aggressively?

China holds mountains of US Treasury bonds (debt), and now it’s watching Washington promise US$1.4 trillion in cheques.

Bottom line: the Chinese government isn’t buying gold to get rich. It’s buying gold to survive the dollar’s demise.

What to do now?

Every great gold bull market has two stages.

First, the early birds buy. Then the public and the big money pile in. A scary correction shakes out the weak hands, and then the second leg begins.

That correction just happened. The weak hands have sold out. The strong hands, from Beijing to Boston, are buying.

Talk of Trump’s cheques will only add fuel. More debt means more printing. More printing means a weaker dollar. And a weaker dollar means higher gold.

The debasement trade is back on. Gold’s second act has begun. Don’t wait for the crowd to figure it out.

By the way, did you know Fat Tail has its own Gold Bug? His name is Brian Chu. I suggest checking out his latest work here.