A Slug Out of the Middle
Two weeks ago, a Mining.com article highlighted a new report by the U.S. Geological Survey revealing that, despite efforts to reshore critical industrial supply chains, over the last year the United States has grown even more reliant on foreign imports of minerals. According to the article, the report underscored “the increased urgency [for the U.S.] to bolster its domestic supply chains.”
The article further noted that the USGS annual mineral commodities summary asserted that last year the U.S. was 100% import-reliant for 16 out of the 90 non-fuel commodities that it tracked. In addition, the U.S. was import-reliant for greater than 50% of its apparent consumption for 54 of the minerals.
By comparison, the 2024 USGS data showed the U.S. was 100% import-reliant for 15 commodities and was greater than 50% import-reliant for 46 minerals.
The article stated that, “for many of the USGS critical minerals, China features prominently as a key supply source.” As Rich Nolan, president and CEO of the National Mining Association (NMA), said in a press release, “this report underscores just how hard it is to put a dent in China’s decades-long strategy to dominate the world’s minerals markets.”
Now, this disappointing USGS report comes at a time when the U.S. government, driven by a national security imperative, is intensifying efforts to establish a critical minerals supply chain that is independent of China.
In describing the nature of the challenge and the disappointing results, Nolan said, “We have an administration and Congress that have united around the need to de-risk our supply chains and reshore minerals production and processing, but it still takes an average of 29 years to bring a mine online in the US.”
In HAI‘s view, this all means that, despite optimistic headlines and some legitimate signs of progress since the Trump administration prioritized reshoring, to date the U.S. remains critically dependent on China (and a number of other countries). We haven’t even begun to put a dent in the rebuilding and reshoring of the defense industrial base that U.S. policymakers have said repeatedly is this administration’s top MAGA priority.
Importantly, that also means that we have not even begun the hard part (the inflationary part) of the rebuilding and reshoring process—yet.
But perhaps that hard part is now right around the corner. As HAI mentioned last week, the U.S. has just announced intentions to set price floors for critical minerals. Price floors are intended to encourage domestic commodity producers to produce more aggressively because they would have no fear of incurring losses. In HAI‘s view, price floors are also likely to be the first step toward that newly expected inflation.
This week, in an interview with Bloomberg, U.S. Under Secretary of State for Economic Affairs Jacob Helberg elaborated on the price floor initiative. Helberg said, “we have had multiple agencies take a close look at this. They’ve developed a very, very sophisticated price floor system that we are having conversations with our allies and partners about… We’re very excited about it because pricing is the key to unlocking private investment.”
Indeed, pricing is the key to unlocking private investment, but government-guaranteed price floors are just a first step toward incentivizing an increase in production. Ultimately, outright commodity price inflation will be needed to fully incentivize U.S. producers to make the really big “private investment” needed to significantly expand production and output quickly.
In addition, if the U.S. gets into any real conflict with Iran (an outcome seemingly made more likely by this week’s rapid and substantial deployment of U.S. military assets), the U.S. will likely run its weapons stockpiles down significantly. That will only underscore the extreme national security imperative to reshore and reindustrialize the defense industrial base—in a hurry.
Putting it all together, in HAI‘s view, this all translates to expectations for a “run the economy hot” inflationary policy setting that’s quietly tolerant of, if not quietly supportive of, the commodity price inflation that sends the needed economic incentive signal for domestic producers to expand operations. It also likely means that, once that inflation hits, yield curve control policies (or some functional equivalent) can be expected from policymakers to keep the bond market (and deficit) under control. And it also very likely means that with a combination of inflation and yield curve control policies to support the bond market, the U.S. dollar would weaken dramatically.
That dramatic weakening of the dollar is, itself, central to any hopes to successfully rebuild and reshore the U.S. defense industrial base.
Just this week, in a Bloomberg article titled, “China’s Economic Policies Are Causing Damage to Others, IMF Warns,” the IMF affirmed that China is by far the cheapest producer in the world and essentially declared that no one in the world can compete with China’s industrial capabilities without significantly weakening their currency relative to the yuan.
In HAI‘s view, that IMF report emphasizes the fact that any hopes for a successful Trump-led reindustrialization and reshoring MAGA effort ultimately revolve around a significant structural weakening of the U.S. dollar.
So again, given the national security imperative to revitalize and reshore the U.S. defense industrial base, HAI expects inflation, some form of yield curve control (financial repression), and a structural weakening of the U.S. dollar. Obviously, that is a combination of factors that’s extremely bullish for precious metals and hard assets more broadly.
The obvious implication here is that because the U.S. remains critically dependent on China, the heavy lifting on vital reshoring efforts (along with all the gold-bullish consequences) remain ahead of us.
Similarly, China’s initiative to internationalize a gold-based yuan to challenge the petrodollar is also likely to benefit, as the U.S. needs to inflate, repress bond yields, and structurally weaken the dollar. That is also an extremely gold-bullish development, and it is also looming largely ahead of us.
In HAI‘s view, with so many powerful gold-bullish fundamentals yet to fully express themselves, the recent correction in precious metals is best interpreted as just that, a corrective pull-back in a still very healthy bull market with much more upside to come.
Lastly, on Friday, the Supreme Court ruled that Trump’s tariffs were unconstitutional. Now, over time, Trump will find work-arounds to reimplement tariffs. In the immediate term, however, striking down Trump’s tariffs should increase U.S. fiscal deficits and undermine initial administration attempts to support U.S. reindustrialization and reshoring. In HAI‘s view, tariffs were an underwhelming part of a plan A to accomplish reindustrialization and reshoring imperatives. Still, even with eventual Trump tariff workarounds, it seems the Supreme Court ruling will likely increasingly shift administration emphasis toward implementing a plan B. In HAI‘s view, that plan B is likely to revolve around a dramatic weakening of the dollar (with inflation and financial repression to boot).
HAI continues to believe precious metals are the primary beneficiary of a generational monetary regime change in which the dollar must weaken as gold is re-legitimized as financial trust back at the center of the global financial system. As Bernard Baruch famously said, “the only guy who bought at the bottom and sold at the top was a liar. I like to take a nice fat slug out of the middle.” We’re not at the bottom in gold, but, in HAI‘s view, we’re also nowhere remotely near the top. And there’s more than a nice fat slug left in this middle.
Weekly performance: The S&P 500 was up 1.07%. Gold was up 1.28%, silver was up 8.47%, platinum was up 4.54%, and palladium was up 4.87%. The HUI gold miners index gained 2.51%. The IFRA iShares US Infrastructure ETF was nearly flat, off 0.22%. Energy commodities were volatile and mixed on the week. WTI crude oil was up 5.44%, while natural gas was off by 5.46%. The CRB Commodity Index was up by 1.46%. Copper gained by 1.15%. The Dow Jones US Specialty Real Estate Investment Trust Index was down 0.89%. The Vanguard Utilities ETF was off 0.50%. The dollar index was up 0.91 to close the week at 97.80. The yield on the 10-yr U.S. Treasury was up 4 bps on the week closing at 4.09%.
Have a wonderful weekend!
Morgan Lewis
Investment Strategist & Co-Portfolio Manager
MWM LLC
