Magician’s Sleight of Hand
This week, HAI is coming to you from the Rule Symposium in sunny (and ridiculously hot) south Florida. It’s been a long and productive week, spent with many macro thinkers and mining company CEOs. As always, HAI would like to thank Rick Rule for putting on another splendid conference.
That said, given a conference just concluded and a bedtime fast approaching (this author has to get up pre-dawn for a flight home), this week’s HAI will be very brief.
The recent attempt by Trump, Warsh, and Bessent to endorse the U.S. commitment to a strong dollar and a dominant U.S. dollar system strikes HAI as little more than magician’s sleight of hand.
At the New York Economic Club two weeks ago (and then again the next day in a Bessent Wall Street Journal op-ed titled, “Scott Bessent: Hamilton inspires Trump’s economic statecraft.”), U.S. Treasury Secretary Scott Bessent highlighted five guiding principles for the U.S.’s new economic direction that “organize our approach to economic statecraft.”
The first is that economic security begins with national capacity. The second principle is that America’s openness will be matched by reciprocity, which is the basis of durable cooperation. The third principle is that America will write the rules of the next economy. The fourth principle is that financial leadership is a central instrument of statecraft. The fifth and “most important” principle is that economic statecraft must serve the American people.
In HAI‘s view, fair enough, but the five guiding principles are fundamentally incompatible with each other unless the U.S. eases it’s grip on the global monetary system via the U.S. dollar system and embraces a neutral reserve asset (which can only practically be gold).
The U.S. cannot rebuild “national capacity” and “serve the American people” while still maintaining the U.S. dollar system’s place in the world. It’s an either/or choice.
At this point, to rebuild national capacity and serve the American people, the dollar needs to become materially (structurally) weaker. Pursuing all three goals will strengthen the dollar to levels that will crash the U.S. and global economies and markets. That sort of strong dollar won’t rebuild national capacity or serve the American people.
Trump, Bessent, and Warsh almost certainly know this. So while they’re suddenly defending the dollar system, HAI senses prestidigitation at work.
When Nixon finally cut the cord between the U.S. dollar and gold in 1971, he not only said it would be temporary, he also assured the world that a dollar today would be just as valuable as a dollar tomorrow. Neither of those promises was true. They were made to reassure people and avoid panic.
Similarly, HAI strongly suspects that the current administration aims to rebuild national capacity and serve the American people (on an intermediate and long-term basis), but knows it must camouflage (for short-term domestic political reasons) the fact that it needs to run inflation hot, yield it’s stranglehold on the global monetary system, and weaken the dollar to attain those two primary goals.
In the meantime, given that China has been talking about the need for a global neutral reserve asset since 2009 and building the rails for a gold-based system since 2015, perhaps we should look to them for straightforward clues as to where things are headed.
This week’s Reuters article titled, “China gold reserves rise most since 2023 even as bullion tumbles” underscores that while the Western narrative talks Warsh, a hawkish Fed, and a doubling down on the post-1971 dollar-based system, China and the world continue to de-dollarize and prepare for a new monetary order oriented around a neutral reserve asset—gold.
Western narrative control and messaging is good for sleight of hand. It’s also been good for producing a counter-trend narrative that has yielded a nasty temporary correction in the gold price. However, in HAI‘s view, it can’t change reality or alter the all-important direction of travel—which is toward gold and much higher gold prices.
We’ve been in an unsustainable U.S. dollar system for 50 years. Now the world (including the U.S.) is in the process of acknowledging that fact. HAI suggests not being fooled by sleight of hand, and recognizing that things are changing—and gold stands to be the biggest beneficiary.
Weekly performance: The S&P 500 was up 1.23%. Gold was off 0.07%, silver was down 1.78%, platinum was up 0.65%, and palladium was up 0.63%. The HUI gold miners index was down 4.78%. The IFRA iShares US Infrastructure ETF was down 0.79%. Energy commodities were volatile and mixed on the week. WTI crude oil was up 4.04%, while natural gas was down 7.81%. The CRB Commodity Index was up 3.72%. Copper was off 1.99%. The Dow Jones US Specialty Real Estate Investment Trust Index was up 0.19%. The Vanguard Utilities ETF was down 0.69%. The dollar index was up 0.09% to close the week at 100.96. The yield on the 10-yr U.S. Treasury was up 7 bps on the week, closing at 4.56%.
Have a wonderful weekend!
Morgan Lewis
Investment Strategist & Co-Portfolio Manager
MWM LLC
